The West universally thought Putin was sabre rattling, we were wrong and he was prepared to inflict terrible human costs on the Ukrainian people as well as halve his currency and stock market in short order. A new geopolitical landscape unfolds as peace dividends and security complacency evaporate. The consequent effect on growth has yet to be determined but what was immediately apparent was that the corporate response on top of government sanctions has been unequivocal and widespread. Rebalancing of sources of supplies of energy and other commodities has accelerated and will have far reaching consequences. Russian bondholders have not yet seen an event of default but it must only be a matter of time.

Markets remain uneasy that central banks may be behind the curve in normalising rates due to inflation being far more structural and embedded than they hoped. The Federal Reserve finally hiked by 25bp accompanied by hawkish rhetoric. Seven hikes appear to be on the horizon but they have left the door open for their pace to be much faster and could move in 50bp increments, Chairman Powell and other members of the FOMC have not been afraid of spelling this out. US Treasury yields have come a fair way as a result, the 10-year moving from 1.50 to 2.25 so far this year although the curve remains relatively flat as the 2-year breaches 2%.

The Ukrainian situation has hastened structural and political change in the EU as joint bond issuance of significant size is mooted to pay for defence spending and moving away from reliance on Russia for its energy needs. ECB President, Christine Lagarde, rightly says that monetary policy can’t do all the heavy lifting and that fiscal policy must play its part, but the Eurozone remains the most susceptible to a stagflation scenario. The Bund curve is now positive from 4-year out having started the year almost completely negative.

The Bank of England hiked again but an 8-1 vote for only 25bp showed a resumption of earlier caution regarding our growth prospects. The Governor’s communication skills still leave a lot to be desired. Credit spreads have widened under the onslaught but in general have not been as volatile as might have been expected. Wider credit index measures in Sterling have only moved back to levels seen in September 2020 although EUR spreads widened back to early 2019 levels. Primary markets were unsurprisingly muted, although dollar issuance was much quicker to recover, and some big deals printed including $30 billion for AT&T.

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