week ending 25th March 2022.

A number of key markets closed the week higher, and in the final week before British Summer Time begins in the UK, the weather is heating up, and so is inflation.

February’s year on year inflation reading came in at 6.2% on Wednesday. As we said last week, expectations for inflation have been heightened by markets, by the Bank of England, and by us, given the unexpected invasion of Ukraine, so this figure was no surprise. Whilst the peak of inflation is due to be higher and later than previously expected, the Bank of England still expects inflation to cool, and to fall back considerably over the next couple of years.

Inflation has been steadily rising across the UK, US and Eurozone in recent months. At a press conference on Monday, Christine Lagarde (the president of the ECB) dismissed the prospect of stagflation in the Eurozone, saying that “even in the bleakest scenario, with second-round effects, with a boycott of gas and petrol and a worsening of the war that goes on for a long time – even in those scenarios we have 2.3% growth”.

Just a few short days after a 0.25% interest rate increase in both the UK and US, Lagarde was quick to point out that Europe and the US aren’t facing the same environment, and aren’t in the same phase of the economic cycle. Europe is further away from a normal interest rate environment than anywhere else globally. Furthermore, whilst both central banks will be cognisant of the war in Ukraine when looking at their monetary policy, the impact of the war will be more of a concern for Europe than the US.

Whilst the main domestic news this week was the Spring Statement, it was largely a non-event for markets. If you missed it, we gave an update on this earlier in the week.

We had talked much about oil and gas in these updates, particularly since the invasion of Ukraine by Russia, and we have discussed the volatility we have seen (and will likely continue to see) in these commodities.

In response to Russia’s invasion of Ukraine, western nations have pledged to reduce their reliance on Russian energy, which has steadily built up over the years.

Whilst this initially concerned markets, and a potential disruption caused oil and gas prices to increase, the west has made it clear that this isn’t a knee-jerk reaction – they are taking a long-term stance.

And as such, ultimately, we are not facing a lack of supply of energy issue, but a reallocation of energy supply issue. Earlier today, the US and EU announced a step towards reducing the EU’s energy reliance on Russia (the EU currently imports around 40% of its natural gas from Russia) – a deal on liquefied natural gas (LNG). The US will supply the EU with an additional 15 billion cubic metres of LNG this year, increasing to 50 billion by 2030. They will work together to store gas across Europe, and crucially build more infrastructure to receive LNG.

These sanctions against Russia have given western nations further reason to look towards means of sustainable energy for the future.

Looking ahead to the next week, some of the key data we’ll be watching out for includes US and UK GDP, PMI data in China, Eurozone inflation and US employment data.

Hannah Owen, Portfolio Specialist