Markets, caught between the Fed and tensions in Ukraine

Who influences the markets more: the Federal Reserve or Vladimir Putin? This question was asked by Christian Siedenbiedel, journalist for the economics section of the Frankfurter Allgemeine Zeitung. Let's take a closer look at his and the opinions of some of the experts he questioned.

Geopolitical crisis exacerbates energy crisis

There are areas of the markets where it is fairly easy to track who is responsible for what. More specifically, it is clear that energy market prices in Europe are coming under pressure from the geopolitical crisis in connection with Ukraine. Siedenbiedel is not just talking about gas, however. Oil, which reached the $90 per barrel mark for a while, is also seeing its price rise more and more. Goldman Sachs has predicted a cost of $100 per barrel, while the fund company Salytic Invest has even predicted a cost of $150 per barrel. However, what is driving up the price of energy is to be found elsewhere too. On the one hand, the recovery in consumption. On the other hand, the taxes levied by governments on the most polluting companies.

The effects of the Fed's announced rate cut

And the Federal Reserve? Many analysts agree that the Fed bears a share of the responsibility for the current downward correction in the stock markets. Higher interest rates mean a tightening of liquidity and greater appeal for fixed-rate investments. In addition to fixed rates, the US currency is also strengthening. The dollar is thus pushing down the price of assets quoted in that currency, such as gold, which in fact touched $1,790 an ounce. Without the current geopolitical crisis, Siedenbiedel points out, the price could have fallen even further. Insecurity is still driving many investors to buy the precious metal as a form of safe haven asset.

And the stock markets?

However, the situation in the equity markets, given its enormity and complexity, is difficult to summarise in a few lines. Not even the recent losses on European and American indices can be ascribed univocally to the Fed or the Ukrainian crisis, explained Jörg Krämer, chief economist at Commerzbank. That the Ukrainian crisis is nevertheless having its effects on the markets is visible. Krämer points out that the P/E of German equities is in line with a ten-year average, in the face of still negative sovereign bond yields.

Ulrich Stephan, chief investment strategist at Deutsche Bank, also believes that this geopolitical crisis could have consequences. On the one hand, rising energy costs would hit high-consumption companies. On the other, it would favour companies supplying liquefied gas. In the meantime, the Russian market is suffering the heaviest losses: since November, financial stocks on the Moscow stock exchange have lost 35% of their value, while energy stocks have lost 17%.

Uncertainties linked to interest rates and the geopolitical crisis

The Federal Reserve seems to have mapped out the various steps that will lead it to normalise its monetary policy. However, uncertainty remains as to how the US economy, employment and above all inflation will respond. On the geopolitical front, the situation is even more delicate: will a diplomatic solution be found and will what has been seen so far remain no more than a showdown, or can we expect an escalation with unpredictable, potentially even disastrous, results?