Russian Invasion of Ukraine

In February the Russian attack on Ukraine hit a market environment that was already tense due to high inflation and increased interest rate expectations. The international stock markets - with various exceptions including Australia, Korea and China Mainland (CSI 300) - subsequently declined largely.

The German DAX share index lost -6.53%, and the broad European Stoxx Europe 600 index fell -6.00%. In the U.S., the S&P 500 declined -3.02%, and Hong Kong's Hang Seng Index closed down -4.66%. Global equities, as measured by the MSCI World, declined by -2.53% - all index figures in euro terms.

In the first half of the month markets were dominated by expectations that the U.S. Federal Reserve would raise key interest rates in several steps in the course of this year in order to control inflation. In January inflation in the USA rose to 7.5% year-on-year, the highest level in 40 years. The main drivers were the rapid rise in energy prices and, secondarily, the material shortages triggered by the Corona crisis and price increases for food.

Inflation in the euro zone also reached a record level in February rising by 5.8% year-on-year. This could also put the European Central Bank under pressure to rethink its expansionary monetary policy: At the ECB meeting in early February ECB President Christine Lagarde already dispensed with her usual comment that there would be no interest rate hike in 2022. In the second half of the month market events were initially dominated by fears of and finally by the actual invasion of Ukraine by Russian troops.

A direct consequence of the outbreak of war was the renewed rise in commodity prices, which in turn is likely to trigger further inflationary pressure. For example, the price of a barrel of oil (Brent) climbed by 10.7% and thus exceeded the $100 mark for the first time since 2014. Natural gas rose by 16.4%, wheat by 21.9% and aluminum by 11.5%. The sharp price increases reflect fears of shortages.

As much as the stock markets fell investors were looking for "safe havens." Accordingly gold was in demand and rose by 6.22% over the month to US$1,908.99 per troy ounce. High-quality government bonds were also in strong demand in the second half of the month, but on the other hand they were under pressure due to persistently high inflation and the associated expectations of interest rate increases. 10-year German government bonds yielded 0.14% at the end of February up 13 basis points and yields on their U.S. counterparts rose 5 basis points to 1.83%. By comparison yields on 10-year Italian government bonds jumped 42 basis points to 1.71%.


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