Soaring energy, commodity and food prices look set to squeeze household incomes around the world as the risk of a protracted war between Russia and Ukraine heightens fears about the possibility of a global recession.
Crude and natural gas prices endured another turbulent week amid tensions within OPEC over increasing oil supplies and a US push to ban Russian crude. Brent crude oil futures stood at $111 a barrel at 17:30 GMT on Thursday, a rise of 43% year to date.
Commodity prices have soared since the invasion amid curbs in supplies from Russia and Ukraine, which export a quarter of the world’s wheat and are key producers of industrial metals such as palladium, nickel and aluminium. A meeting between the two countries’ foreign ministers in Turkey ended on Thursday with no progress on ceasefire.
Wheat prices surged to a 14-year high this week and Chicago wheat futures stood at $11/bushel at 17:00 GMT on Thursday. To put this in context, they were trading about $5/bushel in mid-2020. Nickel trading, meanwhile, was suspended at the London Metal Exchange (LME) this week after prices doubled on Tuesday to more than $100,000 per tonne. Aluminium prices have risen 19% this year on the LME.
“Prices of products such as natural gas, oil, wheat, corn, fertilisers, nickel, and aluminium are skyrocketing and we expect they will remain volatile, as both the conflict itself and the sanctions imposed on Russia raise doubts about the supply of these commodities in the global economy,” says Kunjal Gala, lead portfolio manager, Federated Hermes Emerging Market equities strategy.
The surge in commodity prices has particular importance for agriculture in Brazil, as well as the supply of fertilisers, Gala adds. Russia is a key exporter of potash, phosphate and nitrogen-containing fertilisers producing more than 50 million tonnes a year of, 13% of the global total.
Markets under pressure
Global markets endured another tumultuous week as the conflict added to concerns about supply chain disruptions and inflation, heightening margin pressure for corporates in the real economy.
The UK FTSE 100 Index closed Thursday down 1.27% while the pan-European Eurostoxx 50 Index was down 3.04%. “We are experiencing extraordinary volatility in global equities compounded by wavering market sentiment and the risk of recession intensifies on spiralling commodity prices,” says Louise Dudley, portfolio manager, Federated Hermes Global Equities strategy. “The potential for further supply shocks across the economy is acute.”
Dudley adds that while there still looks to be a large risk-off sentiment, markets appear more open to taking on some risk and reinvesting in growth stocks. “We remain broadly balanced from a style perspective and buyers of defensive growth, and in particular US companies with a domestic focus, less exposed to global macro headwinds,” she says.
Despite global markets experiencing a torrid start to the year it still feels like they’re trading in an orderly, albeit volatile, manner with support and tentative buying at cheaper levels, says Stephane Michel, Head of Fixed Income – Multi Asset Credit, at Federated Hermes.
“Any positive rumours or announcement is met with enthusiasm and FOMO (Fear of Missing Out) and buy the dip have been such good performers as investment strategies through the previous crises – this week the iTraxx Crossover traded in a range of 438 to 364, an amazing volatility,” Michel says.
“Occasionally, however, we do get reminded of the prospects of military escalation, stagflation, supply chain disruption, sanctions, energy blockades and so on and we move lower still. What is clear is there is little consensus or conviction on which direction we go next.”