Week ending 8th April 2022.

Following allegations of appalling civilian killings in Ukraine, we saw the EU, G7 and US pile on further pressure towards Vladimir Putin by coming together to coordinate further sanctions against Russia.

The newest raft of sanctions includes the US deploying full blocking sanctions against Russia’s largest private bank, Alpha bank and prohibiting new investment in the Russian federation by US persons.

The EU will ban various imports, including coal, which is a much easier tie for the EU to sever than oil and gas. These imports are thought to be worth around 4 billion euros per year, with some of the countries in the EU most reliant on coal being Poland, Germany and the Czech Republic.

As the EU has previously signed the Paris Agreement (agreeing to rapidly decarbonise its power sector), they are already on a path towards reducing the amount of coal used, and these sanctions could work in harmony with the EU’s long-term goals. On Friday, Japan also weighed in on sanctions, by announcing a ban on Russian coal imports.

Global markets have been less reactive to this week’s sanctions when compared to earlier rafts of sanctions against Russia, showing markets have priced-in and braced themselves for the impacts and repercussions of war.

Following the recovery of the Russian Ruble, Russian interest rates were cut on Friday, from 20% to 17% to support the economy. Whilst a 3% rate cut would seem bold in any normal monetary policy environment, it is only a small pullback from the extortionate rate we have seen over the last month.

The most notable release this week was the Federal Reserve minutes from their March meeting, which showed that many of the members were on board with countering inflation with one or more 0.5% interest rate increases. This is not surprising – we think it is worth taking a step back and looking at the bigger picture here. The Fed signalling that they may raise interest rates by 0.5% in the future if inflation remains high, is a far cry from the Fed immediately cranking up interest rates to high levels. They have confirmed that they will be data dependent and measured, and are willing to gradually raise rates from their low levels.

The Fed minutes also gave us some transparency on their quantitative easing plans, revealing that they plan to tighten monetary policy by slashing their balance sheet by up to $95bn per month.

One must remember that the balance sheet grew massively over the pandemic to provide support to the economy, and so the central bank has a lot of asset shedding to do before getting back to pre-pandemic levels.

Following the release of the minutes, markets fell mid-week, but bounced towards the end of the week.

Whilst the Easter holidays means next week is a four-day week for some key markets, there are still plenty of key data releases, including Chinese, UK and US CPI, UK employment data and the ECB interest rate decision.

Our next scheduled update will be on Tuesday 19th April, although we will provide a market update should any major market moving events occur.

Investment Management Team

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