The stock markets recouped their losses

Despite more than a month of war in Europe, most financial markets have stabilised. At the same time, the yield curve has inverted, which in the past has been an indicator of a recession.

For the month as a whole, the US S&P 500 Index rose by 3.7 per cent measured in USD, while the European Stoxx 600 Index increased by 1.1 per cent measured in EUR and the Nordic VINX Index climbed 2.6 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) rose by all of 4.9 per cent.

Commodity squeeze
Due to the war in Europe and sanctions against Russia, access to a number of commodities has been cut off. Russia exports around 40 per cent of the gas consumed in the EU, and there have been fears that this supply would be blocked. So far, this seems less likely. Such a scenario would lead to already high energy costs increasing even further, which would affect households’ buying power. It might also lead to factories being closed and workers being laid off.

Inversion of the yield curve
The war is one of several factors contributing to the highest inflation rate in 30-40 years. The central banks have responded with increasingly hawkish rhetoric, leading to short-term interest rates now being higher than long-term ones in large parts of the yield curve (inversion).  Historically, this has been an indicator of a forthcoming recession. At the same time, a period has elapsed between the inversion and the recession becoming a fact. Last time we saw an inversion was in August 2019, eight months before the recession in 2020. Many people will nonetheless allege that the fixed-income market predicted this recession by chance, since the recession was triggered by the pandemic. 

Low unemployment
The US unemployment rate is currently 3.6 per cent, indicating that we are in the late-cycle phase.  In comparison, unemployment bottomed out at 3.5 per cent before the pandemic. Low unemployment indicates rising wage growth in an economy that is already close to full capacity utilisation. The central banks will want to subdue this trend by imposing restrictive measures and slowing demand. The market is now pricing in interest-rate hikes, and the US central bank will probably announce it will start to reduce its balance sheet in May. 

The road ahead …
The stock markets have shaken off a lot of their fall following Russia’s invasion of Ukraine, and the MSCI World Index is actually 5 per cent higher than it was before the war started. Although the war remains a risk factor, the focus has shifted back to inflation and monetary policy restrictive measures.  Basically, higher interest rates are negative for shares, but we are still seeing good company earnings and inflation protection that mean shares continue to be an attractive asset class.