March 2022 / INVESTMENT INSIGHTS
The Market Implications of the Conflict in Ukraine
Central banks face a more difficult task tackling inflation.
- Supply chain issues and inflationary pressures are likely to persist for longer, complicating the task of central banks trying to engineer a soft landing.
- We expect developed market central banks to proceed with hiking interest rates in the near term, but over a longer-term horizon there is greater uncertainty.
- Volatility is set to continue in financial markets with potential for price dislocations to occur.
Q. How have markets reacted to the conflict?
The markets have behaved in a very logical way in the wake of Russia’s invasion of Ukraine, with the main reactions focused on securities directly impacted by sanctions or at risk of being impacted by further sanctions.
That this would be a brief incursion is now a lower‑probability outcome than was hoped. That means supply chain issues and inflationary pressures are likely to persist for longer. We already see this reflected in oil markets but expect these impacts to spread to other markets, like grain and other products sourced in Ukraine and Russia.
In general, for fixed income, T. Rowe Price was in a fairly low‑risk position heading into this crisis, which positions us well to take potential advantage of dislocations that are likely to occur over the next few months. Markets were already growing more volatile before this event unfolded, and we expect the conflict to exacerbate the situation.
Q. What are the broad economic impacts?
Among the broader impacts of this conflict, supply chain issues and inflationary pressures will be top of mind for many investors globally. These will almost certainly complicate the already difficult task that central banks were facing—trying to battle inflation.
The expectation heading into this conflict was for most developed markets central banks to begin raising rates in the near term. The U.S. Federal Reserve was expected to start raising interest rates in March, for example.
The events in the last few days almost certainly muddy the waters for central bankers. This will make it difficult to engineer a soft landing—a complex feat in almost any market environment.
At this point, we believe central banks will proceed as planned and that rates will begin to increase in March. The picture will be a little more difficult to ascertain as the year rolls on and will likely depend on how the conflict plays out.
Q. What are we watching next?
We’re watching a number of areas that have the potential to trigger an escalation.
- Developments around the flow of gas and oil out of Russia.
- Russia has signaled respect for NATO treaties, but any signs this is changing would be a cause for concern.
Q. What is our longer‑term fixed income outlook?
Prior to the conflict, interest rates were moving higher and credit spreads were moving slightly wider. These were logical moves based on the fact that central banks were removing their ultra‑easy monetary policies that have been in place for the entire COVID‑19 pandemic.
Growth and inflation data have been extremely strong, making this pivot in central bank policy logical. One of the results of such a change in policy has been an increase in volatility. Such periods have the potential for price dislocations to occur and buying opportunities to emerge.
In recent history, Treasury yields in the 2% to 2.5% range and high yield bond spreads of about 500 basis points have been extremely attractive to our clients. We expect that those levels will be reached over the course of this year. Consequently, this can contribute to growing interest in bonds as the year rolls on.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
February 2022 / INVESTMENT INSIGHTS
March 2022 / VIDEO