The United Kingdom will shortly take it upon itself to deploy long-range missiles to Ukraine and also train the Ukrainian forces on how to operate them, even though Moscow stated that in the event of this happening the conflict would surely retaliate. Vladimir Putin, the president of Russia stated that the facilities that are holding said ammunition will be hit by Russian forces.
The military equipment is similar to the weapon system that the United States just delivered to Ukraine included in the $700 million military package sent to combat the conflict. Long-range missiles, on the other hand, will not be dispatched to the troubled country, according to US President Joe Biden.
Economic pressure is also being increased by the Western countries. Leaders of the European Union have decided to prohibit the preponderance of Russian oil imports, particularly by sea. The difference is critical: discussions were stymied by Hungary, which claimed that a blanket prohibition on pipelines would drive up energy prices dramatically, especially for countries that are landlocked, leading to a compromise that was eventually made.
With the exception of Hungary and the landlocked neighboring countries, 90% of Russian oil shipments will be prohibited by the end of 2022. Nevertheless, Europe is risking a self-sabotaging move because even though for a short period of time this move could prove to be beneficial politically, and economically it will surely be detrimental in the future.
In addition, European leaders decided to drop Sberbank, Russia’s largest bank, from the Society for Worldwide Interbank Financial Telecommunications (SWIFT). These retaliatory steps come as Russia intensifies its offensive in the Donbas area.
Greater military aggression by Russia on Ukraine may force the West to implement new punitive measures in order to raise the invasion’s economic cost. Nevertheless, as witnessed in Europe, if the supply shock from restrictions resonates back to the originator and worsens inflationary patterns, this might destabilize regional economic patterns.
As a consequence, central banks may be more tempted to increase their attitude and policy on rate hikes in order to prevent excessive price inflation. Traders may have little to look forward to if economic fundamentals deteriorate and lending conditions worsen. Therefore, assets with high growth potential such as stocks and commodity currencies are prone to take a hit.
When examining the S&P 500 index in a weekly period, it has plummeted to slightly above 4100 from an all-time high of 4818.62. While there has been a slight uptick since May, this does not imply that a full-fledged rebound is imminent. Considering the macro-fundamental conditions, this could be a temporary pause in an already dramatic, longer-term collapse.
Markets may also be impacted by two important reports due out this week. The World Bank will release its Global Economic Prospects report on June 14th, which is expected to be pessimistic. The Organization for Economic Co-operation and Development (OECD) will release its biannual Economic Outlook on June 15th.
Both assessments are expected to highlight important macro-fundamental issues, such as the Ukraine conflict and how interruptions there are exacerbating supply chain constraints associated to COVID-19. A prominent concern will almost probably be rising commodity prices as a result of sustained demand and trailing supply, fueling the embers of inflation and compelling central banks to increase the rates as a result.
Among the most serious challenges to financial stability will be tightening terms of the loan. Investors have benefited from a lengthy period of ultra-easy credit, which has fuelled the creation of complicated derivatives with less safeguards. Increasing interest rates will put them to the question, and the resulting volatility will almost certainly flow over into equities, dragging the S&P 500 lower.
China will release its May CPI and PPI numbers on June 10th, with economists predicting 2.2% and 6.5% growth rates, correspondingly. Similar figures will be released in the United States, with CPI expected to rise 8.2% year on year (YoY) and 0.7% month on month.
Rising inflation data will certainly bolster hawks at the Federal Reserve and the People’s Bank of China, as inflation is at the center of policymakers’ concerns. The Federal Reserve’s next rate hike is expected to be 50 basis points, as per interest rate futures, so the inflation data this week will almost definitely have no impact on that judgment. If CPI data surges to the upside, though, investors may get concerned about the possibility of rapid stimulus withdrawal in the months ahead.
