The Russia–Ukraine war dominated headlines over the month, but markets also kept a keen focus on insights from key central bank meetings. Sanctions against Russia intensified, with several countries, including the United States (US) and UK, announcing bans on oil imports from Russia. A number of global companies have voluntarily shunned buying oil from the country and others have closed operations temporarily. Index providers, notably MSCI and FTSE, removed Russian equities and bonds from their benchmarks, which will likely prompt further outflows from this market. With financial sanctions impacting the currency and its conversion, whether the country will be able to continue to service their hard-currency sovereign debt payments remains a key concern. Progress in talks between Russia and Ukraine prompted some optimism for a de-escalation of military action, helping to stabilise markets. With the war waging on multiple fronts though, Russia has demanded that natural gas payments be made in Russian rubles from 1 April, although the demand was tempered by allowing payments in other currencies through a designated bank.
 

Although equity markets recovered some lost ground in March, global equity and bond markets declined over the quarter as the turn of interest rate cycles, more hawkish central banks and impact from the war reverberated across markets. Year to date the MSCI World Index has declined by 5,0%, while the MSCI Emerging Markets Index has lost 6,9%. There was a sell-off in global bond markets, under pressure from high-inflation prints and hawkish central banks, with the loomberg Global Aggregate Bond Index declining by 3,0% in March, bringing the year-to-date decline to 6,2%. US bond markets recorded one of the worst quarterly declines in decades.

Added complexity
The US Federal Reserve started its interest rate hiking cycle with a 25 bps increase, but there have been increasing calls for a 50 bps move from several Fed governors, which set the tone for market movements. The Bank of England increased interest rates by 25 bps, with interest rates now back at pre-pandemic levels. Eurozone preliminary inflation figure for February printed at 5,8% on the back of higher energy prices, the highest figure since the euro was introduced and re-emphasising the region’s vulnerability to the impact of the Russia–Ukraine war. The European Central Bank kept rates unchanged and brought forward the end of their asset purchase programme to Q3, suggesting that inflation concerns currently still outweigh growth concerns.

Policymakers are now facing the added complexity of multiple supply shocks and data that remain fluid in the face of the conflict. Against this backdrop the US bond yield curve has inverted. Historically, this is seen as a bearish signal of slowing growth, with markets pricing in an inflationary problem that requires higher interest rates in the near term, alongside an even higher probability of a recession in a few years from now. Although a better indicator of trend rather than of timing, the markets assessment of risks, at a minimum, will weigh on policymakers’ minds in the months to come.

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