Volatile but resilient in the face of the Russian invasion of Ukraine, the world stock markets were overtaken on Friday by this insane incursion with multiple collateral effects. There is fear of a recession in Europe, of stagflation in North America with, as a result, an inflationary drift which continues to accelerate with the surge in oil prices and the explosion in food prices. What seemed to be confined to the Moscow Stock Exchange is thus experiencing excesses. Global stock markets fell sharply on Friday, particularly European indices, with the intensification of fighting in Ukraine raising fears of an economic recession there as the spillover from the Russian offensive at nuclear power plants fueled the darkest scenarios.
Paris fell by 5%, Frankfurt by 4.4% and Milan by 6.2%, completing their worst session and their worst week since the announcement of the first confinement in March 2020. Over the week, they lost more than 10% each. London, more resilient since the start of the year, dropped 3.5%, notes Agence France-Presse (AFP).
Other signs of weakness in Europe, the single currency, at $1.0912, fell below the symbolic threshold of $1.10 for one euro, a level not seen since the first months of the COVID-19 pandemic. “Investors are increasingly concerned about the risks of recession and escalation,” comments Craig Erlam, analyst at Oanda. “The market anticipates that corporate profits will fall back, it now incorporates elements of recession,” confirms Alexandre Baradez, analyst at IG France, according to comments taken by AFP.
In Asia, after losing more than 3% shortly after the announcement of the bombing of a nuclear power plant, the financial centers recovered somewhat: Tokyo ended down 2.2%, Hong Kong 2.5% and Shanghai, by 1%.
In New York, the market also opened lower, then widened its losses and then saw its decline lessen, as the American economy was less exposed to Russia. In Toronto, the S&P/TSX was supported by the influence of commodity prices on the benchmark, posting a 0.7% gain on the session. The Dow Jones lost 1.4% during the session to end down 0.5%, the decline was 1.7% for the Nasdaq, 0.8% for the S & P 500, which lost 1 .6% at one time.
Clearly, investors were maintaining their focus on the situation in Ukraine, ignoring good employment figures. A total of 678,000 jobs were created in February after 481,000 in January, according to data from the US Labor Department released on Friday. This is much more than the 400,000 expected by analysts. In addition, the unemployment rate fell more than expected, to 3.8%, after 4% in January, approaching its historic low level before the pandemic (3.5%). “For the market, these are indicators of the past that have almost no meaning given the current context,” explains Mr. Baradez.
Tough week for inflation
In the gas market, fears of disruptions to exports from Russia, which supplies 40% of European gas imports, pushed prices to their all-time high.
On the oil side, the barrel of Brent from the North Sea closed on Friday at US$118.11, its highest since August 2008, galvanized by the de facto halt in Russian exports. Since the start of the invasion of Ukraine, Brent has gained 21.9%. In New York, a barrel of West Texas Intermediate jumped 7.4% on Friday, ending at US$115.68, a first since September 2008.
Consequences: in Canada, the price of gasoline thus reached $2 per liter in British Columbia. Its average price is $1.80 per liter in Quebec. In the United States the price of a gallon of regular gasoline in California exceeded US$5, unheard of.
Added to these inflationary pressures from energy prices are the effects of overheating prices on the real estate scene. February data from the Association professionnelle des courtiers immobiliers du Québec released Thursday indicates that property sales in Greater Montreal fell 12.5% compared to February 2021. We are talking about a ninth consecutive annual decrease which does not however, fails to influence the course of property prices. The median price showed an increase between 16% and 20% over one year, depending on the type of property. And the overbidding remained very present, particularly in sectors outside the Island of Montreal, where it affected in February more than 50% of all residential real estate transactions, underlines the association.
All of this should be seen in the context of a market for agricultural products with record price increases, with a new mark established in February. The benchmark global food price gauge rose in February to its all-time high, with vegetable oils and dairy products the biggest contributor to the rise, the United Nations said on Friday. United Nations for food and agriculture. The FAO Food Price Index averaged 140.7 points in February, up 3.9% from January, 24.1% above its value a month ago. year and 3.1 points more than its level reached in February 2011.
It should be added that this new summit in February only partially takes into account the effects of the conflict in Ukraine on the markets. Oxford Economics calculates that Russian military action could add 4.5 percentage points to growth in global food prices, which are expected to grow by more than 14% this year.
Risk of stagflation
If we now fear a recession in Europe, the word stagflation is increasingly used in scenarios on this side of the Atlantic. Soaring energy prices and distortions in supply chains have created a supply shock that is amplified by labor shortages. Added to this now is the probability of an inflationary slippage that is more long-term. In its Monetary Policy Report published in January, the Bank of Canada saw inflation as measured by the consumer price index remaining around 5% during the first half of the year, to end the year at around 3 %, as distortions in supply chains fade. Inflation is then expected to hover around 2.25% in the second half of 2023 to stay close to the 2% target in 2024.
It was before the war offensive of Russia. From now on, we should rather count on inflation exceeding 6% in the second quarter to end the year around 4%, ie double the central bank’s target, says Oxford Economics.
And that’s not counting the unpredictable.
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