Russian invasion of Ukraine jeopardises positive capital market development
2021 was predominantly characterised by a strong recovery from the Covid-19 crisis of the year before, in the overall economy as well as in the financial markets. The main reason for this were the broadly successful countermeasures to contain the pandemic, combined with unprecedented monetary and fiscal policy support on both sides of the Atlantic. The result was a strong economic recovery following the sharp drop in growth in the wake of the Covid-19 crisis. Unfortunately, the war in Ukraine that broke out at the end of February overshadows any further economic recovery in 2022. In particular, the prices of European securities have reacted negatively in the wake of the Russian invasion.
Share rally in 2021
The global stock markets had already been betting on a scenario of strong economic data and rising corporate profits since autumn 2020 and recorded corresponding gains. Many important stock indices continued this rally in 2021 thanks to improved economic indicators and attractive labour markets. By August 2021, for example, the S&P 500 had doubled since its lows of the Covid-19 crisis and continued to set new records. At the end of December 2021, the broad US market – measured by the S&P 500 – was up almost 27 per cent compared to the beginning of the year. The development of the domestic ATX was even stronger, up by as much as 44 per cent over the course of the year. The main driver of the overall strong global stock market performance was in fact the expected profit development of the companies in addition to the recovery of the global economy.
Rising inflation, persistently low interest rates in the eurozone
While the gross domestic product of the eurozone increased by around 5.0 per cent in 2021, the inflation rate also showed a steady upward trend: a rate of –0.3 per cent in December 2020 contrasted with a substantial inflation rate of more than 4 per cent at the end of 2021. Interest rates, on the other hand, remained low. The monetary policy of the European Central Bank (ECB) ensured that money market rates (Euribor) remained closely aligned with the ECB deposit rate of –0.5 per cent in 2021. In March, the ECB reacted to an undesired rise in long-term interest rates and increased the monthly volume of bond purchases as part of the Pandemic Emergency Purchase Programme. This kept long-term interest rates only slightly above short-term interest rates until the end of August. From September onwards, medium- to long-term capital market rates moved somewhat upwards, which also triggered higher interest rate and inflation expectations in the short term. Towards the end of the year, however, renewed concerns about the pandemic and economic developments led once again to a flattening of the yield curve. In contrast to the development in the eurozone, interest rate expectations in the USA have already risen by 2021 year-end. This upward movement was driven primarily by the US central bank (the FED), which has unequivocally signalled a tightening of the ultra loose monetary policy for 2022.
War in Europe
Major uncertainty arrived in Europe in February 2022 with Russia’s war of aggression in Ukraine. Aside from the unimaginable human suffering in Ukraine, the medium- to long-term effects on the European real and financial economy can barely be foreseen currently as of mid-March. Western countries, with the USA at the forefront, adopted and implemented unprecedented sanctions against Russia in response to the attack which violates international law. This directly or indirectly affects global commodity and food markets, energy prices, industrial inputs and, in particular, international financial transactions with Russia. The capital markets have reacted accordingly, with European stock indices in particular losing value.