Wen | Wang Lifeng
Editor| Lu Ling
The Fed's interest rate hikes and the geopolitical conflict between Russia and Ukraine have dominated the global capital market since the New Year's Day, with sharp shocks in global stocks, bonds, foreign exchanges, and commodity markets.
The dollar raises interest rates, the Fed or half-hearted
Benefiting from the economic recovery, the US CPI hit its highest point since February 1982, and both in January and the previous month's CPI announced in February reached a high of 7%. In order to curb economic overheating and guard against potential risks, the Fed is expected to restart the interest rate hike process in March this year. Fed officials, including Powell, have spoken out frequently to inform the market that the Fed is about to raise interest rates. St. Louis Fed President Bullard, who represents a hawkish stance, even said he "would like to see a 100 basis point hike by July 1."
The Fed's interest rate hike has been disrupting the market since November last year. Some investors have opted to sell risky assets in response to potential liquidity risks arising from a dollar hike. Since then, the US Nasdaq index has fallen by about 15%, and there is even a possibility of falling into a bear market from the technical level.
The performance of commodities is contrary to the performance of US stocks, especially crude oil, one of the world's most important commodities, which continues to rise. Brent crude is up about $30, or nearly 40 percent, from its lowest point of about $65 a barrel in early December. A number of factors, including geopolitics and supply shortages, have contributed to the continued rise in international oil prices.
Non-ferrous metals also perform well. In the context of global carbon neutrality, the medium- and long-term strong demand for new energy vehicles and energy storage hedged the negative impact of the US dollar interest rate hike, and the copper spot price of the London Metal Exchange (LME) remained at a high of about $10,000 / ton. Lun copper has been hovering around this price for nearly a year.
There are some different voices in the market. In fact, many institutions may think that the Fed's interest rate hike may be half-hearted. Affected by the current stock of $30 trillion in U.S. treasuries, it is difficult for the U.S. government to afford too much of a rate hike.
Chen Li, chief economist of Soochow Securities, believes that "global monetary policy will end the loose environment in 2022, and the Fed is expected to raise interest rates no more than 4 times."
Des Lawrence, senior investment strategist at State Street Global Advisors, believes the market may have been carried away by expectations of interest rate hikes from the Fed and the Bank of England. While federal fund futures indicate there will be as many as seven rate hikes this year, Lawrence said the Fed could end up adding only two or three.
The geopolitical conflict between Russia and Ukraine, the global market shock
Just when the news of the US dollar interest rate hike is expected to be gradually digested by the market and the capital market is gradually stabilizing, the sharp escalation of the Geopolitical conflict between Russia and Ukraine has broken the temporary weak balance of the global capital, commodities, foreign exchange and other markets, and the market has reappeared with huge fluctuations.
On February 21, Russia announced its recognition of the independence of the two regions of eastern Ukraine, and the Conflict between Russia and Ukraine escalated gradually, eventually turning into a war between the two sides.
The potential for war to expand in scale, even evolving into fears of a head-on conflict between Russia and the U.S.-led NATO, has sparked a panic sell-off among investors. In particular, on February 24, after the news of the Russian army announcing military action in the Donbass region, the global capital market was shaken.
On February 24, the Eurozone STOXX fell the most by 5.23%, the German DAX by the largest by 5.63%, the NASDAQ index fell by 2.57%, the S&P index fell by 1.84%, and the Dow Jones fell by 1.38%. The Performance of the Russian market was even worse, with the largest decline almost cut to the waist, and then the decline narrowed, and the decline was still more than 30% after the close of the 24th.
In the currency market area, money poured into safe-haven assets, and the US dollar was highly sought after, with the highest rise of more than 15,000 BP, or 1.59%, on the day, and the closing gain was still nearly 1%, the largest single-day gain in the past three months. The rise in the US dollar reflects the market's demand for safe haven.
Other images reflect investors' concerns about disruptions in global supply chains amid geopolitical conflicts, especially in commodities such as energy and food.
This fertile black land of Ukraine is rich in corn and wheat, and agricultural products are widely supplied to Europe, known as the "granary of Europe". Russia is one of the world's most important wheat production and export regions, with wheat exports accounting for 20% of the world's share.
In the context of the Geopolitical Conflict between Russia and Ukraine, any expanded military action or subsequent international sanctions could lead to the disruption of port traffic in the Black Sea region. As the world's most important food-producing region, grain from Russia, Ukraine, and nearby Romania and Kazakhstan is transported through ports in the Black Sea.
In the field of energy, Russia is one of the world's most important oil and gas producers, and its exports are among the highest in the world. Public information shows that 40% of the EU's natural gas depends on Russia.
Against this backdrop, on February 24, the price of commodities such as crude oil and natural gas soared. In terms of Brent crude oil, the most important crude oil pricing benchmark in the international crude oil market, the maximum increase on the day was nearly 9%; the largest increase in crude oil futures on the New York Stock Exchange was more than 8%. In terms of natural gas, affected by supply shortages and potential supply disruptions, the Dutch TTF natural gas futures price, the benchmark of the "European gas price vane", once pulled up more than 60%, and rose 33.3% at the close. In terms of grain, wheat and corn also rose sharply.
However, as the information gradually became clear, investors confirmed that Ukraine was actually "abandoned" by the West, that is, the war was difficult to fully expand, optimistic investors began to actively buy, which also contributed to the rebound of the global market after the 25th.
Overnight (25th), Russia and Ukraine expressed their positions of negotiation, and the market further warmed up. On February 25, U.S. stocks rose sharply, with the Dow Jones up more than 2.5% and the Nasdaq up more than 1.6%. Safe-haven assets were abandoned by investors at this time, the dollar plunged more than 4,000 BP on the day, and gold also fell. Crude oil, which previously benefited from geopolitical tensions, showed a significant correction in commodities such as grain.
In addition, based on the political impact of the Russian-Ukrainian conflict, the prospects for global economic development have been damaged, and the market has doubts about whether the Fed can continue to implement the previous line of interest rate hikes.
In addition to crude oil, currencies, stocks and bonds, there is another class of assets that is also eye-catching, that is, Bitcoin. The S&P Bitcoin index has plunged 11.4% since the Russian-Ukrainian conflict. Bitcoin's plunge reflects a decline in market risk appetite sentiment.
The Chinese market has not been able to stand alone, and it is also affected by the us dollar interest rate hike and the Russian-Ukrainian conflict. Superimposed on the slowdown in economic growth, since December last year, the A-share market ChiNext board, the science and technology innovation board has been greatly adjusted. Entering February, with the escalation of geopolitical tensions between Russia and Ukraine, the A-share market has undergone a strong adjustment with overseas markets, especially on February 24.
However, the attributes of RMB safe-haven assets have gradually become prominent. At a time when the conflict between Russia and Ukraine is escalating, the offshore RMB index has appreciated significantly.
The performance differentiation of global large-scale assets has intensified, and commodities have risen
Against the backdrop of the dollar hike and the geopolitical conflict between Russia and Ukraine, the global large class of assets behaves differently. Bitcoin, developed countries, including stocks in the United States, have become the worst-performing asset classes in recent times.
On the whole, in the nearly three months since the beginning of the year, the best performance is commodity assets, especially energy products represented by oil. This performance also puts the importance of food and energy for economic development in front of countries around the world, including investors.
The Chinese government is fully aware of this. Earlier, the People's Daily Review published a commentator's article entitled "People's Daily Publishes Five Articles in a Row to Discuss Five Major Theoretical and Practical Issues," which pointed out that it is necessary to "correctly understand and grasp the supply guarantee of primary products" and that "agricultural products, energy, minerals, and other primary products are the most basic parts of the entire economy, and strengthening the supply guarantee of primary products is a practical need and a long-term strategy, which has a bearing on the sustained and stable development of the mainland."
Next, we may wish to use a chart to systematically show the rise and fall of the global large class of assets in the past three months.
Through the above chart, it is not difficult to see that despite the expectation of a US dollar interest rate hike, the US dollar is not as strong as many investors expected, and behind it more or less reflects the market's doubts about the strength of the Fed's interest rate hike.
In terms of currencies, most of the non-US currencies fell sharply relative to the US dollar, which included the euro, the yen, and the british pound, but the renminbi shined, highlighting the resilience of the Chinese economy and the need for safe-haven funds in the context of the Russian-Ukrainian conflict. Since the escalation of the Conflict between Russia and Ukraine on the 21st, the offshore RMB has risen by 0.22%.
It is worth mentioning the Treasury bond market, especially the US Treasury. As the news of the dollar rate hike was gradually digested, the overall U.S. Treasury note was sluggish. Since then, affected by the Conflict between Russia and Ukraine, the market has questioned the strength of the Fed's interest rate hikes, and the US Treasury bonds have become a high-level shock pattern in recent trading days, and the momentum of further rise in Treasury yields has weakened significantly.
Some of the safe-haven funds did pour into gold. Since entering February, the London spot gold price has risen by 5.48% so far as the Russian-Ukrainian conflict has begun to heat up. Especially on the 24th, the price of gold rose by about 3.5% at one point. As war fears fell, gold prices retreated rapidly, closing slightly down 0.25% on the 24th, closing at $1903/ ounce.