The war in Ukraine is fueling inflation of energy and raw materials
Heading into 2022, I wrote in my column that the big story would be the battle between solid economic growth and corporate earnings versus inflation and the threat of a rising interest rate environment. Of course, rising interest rates (by design) can suppress economic growth. There is a risk that rising interest rates could eventually cause a recession or slow down a stock market run. In that column I wrote:
“Except for a black swan event, 2022 could be a solid year for investors. (A black swan is an unpredictable and catastrophic event, like the pandemic.) However, we are never free from risk. The main risk may remain tricky inflation. , and that could lead to the need for more aggressive rate hikes.”
Enter the black swan. Unfortunately, the real battle in 2022 is a war in Europe. That tragedy is underway and it is negating any concerns about the portfolio. But the invasion of Ukraine poses real economic risks on a large scale. The war poses greater risks to humanity, as the conflict could escalate into a world war or even a nuclear confrontation.
On January 7, Charles Schwab listed the known risks for 2022, including geopolitical risks.
The war in Ukraine is no substitute for the struggle between economic growth and inflation and rising tariffs. On the contrary, the conflict has led to increased inflation of energy and raw materials. Economic growth can be strongly affected, especially in Europe.
Russia is a major producer of energy, metals and potassium. It supplies about 41% of the natural gas imported by the EU. Russia and Ukraine are also major agricultural producers and exporters. The war is inflationary on many fronts.
As central bankers try to fight inflation, they do so in the fog of war. The threat of a dangerous policy error is heightened. The banks could raise rates to combat increased inflationary pressures caused by the war. At the same time, the war could dampen economic growth. Walking rates during a slowing economy could lead to a recession. I’m not suggesting a recession is imminent, but these are the concerns of the Fed in the US, the Bank of Canada and other central banks around the world.
Here’s a great chart tweeted by Lance Roberts (no relation to me) of RIA Advisors. We see that commodities can be a drag on performance for a long time – and then assets do their thing when inflation peaks.
This post Understanding the markets this week: March 6
was original published at “https://www.moneysense.ca/save/investing/making-sense-of-the-markets-this-week-march-6/”