The increasingly damaging effect on investor sentiment spilled over to Asian markets overnight and washed onto UK shores in early trade. With the exception of the oil majors, there was next to no buying interest of note, with mining and airline shares continuing to suffer. The moves were compounded by the additional downward pressure of a number of stocks being marked ex-dividend, including the likes of NatWest (LON:), M&G and Standard Chartered (LON:). The weakness continues to chip away at the progress which the premier index had been making, although unlike many of its global counterparts the is clinging on to a gain for the year to the tune of 2.5%, although the has given up its previous rise and currently stands 2.8% down.
On the domestic front, what would normally have been a mildly positive release was also caught in the crosshairs of the conflict. Unemployment remained steady at 5.2%, but more importantly perhaps wage inflation slowed to 3.8% from a previous 4.2%, relieving some pressure. However, even at the lower level prices are well above the Bank of England’s target, let alone any inflationary pressure to come over the following months, almost certainly leaving the central bank no option but to sit on its hands for the time being.
The remains in the driving seat, adding another spurt in reaction to a fresh bout of targeted attacks in the Middle East and depressing risk sentiment especially across equities.
The main unknown and therefore the largest concern for investors has been the duration of the conflict. The longer it progresses, so the chances of higher inflation and crimped economic growth become elevated. At the current time, the conflict appears to be escalating rather than abating, with the rhetoric from both sides threatening further military strikes.
With this backdrop in mind, central banks have had little option but to adopt a wait and see approach. Any inflationary impact from the conflict is not yet feeding through to economic data, and the Bank of Japan and Bank of Canada joined the Federal Reserve in leaving interest rates unchanged, with the Bank of England and ECB expected to follow suit later.
An added complication for the Fed prior to its announcement was the release of the , a measure of wholesale prices, which showed a rise of 0.7% in February against expectations of just 0.3% and 3.4% annualised. With the index also remaining higher than the Fed’s target, the clear implication is that inflation was already precariously balanced prior to the outbreak of hostilities.
Central banks in general will also be mindful that their accompanying comments carry the prospect of doing more harm than good. They will certainly want to avoid a repeat of 2022, when Russia’s invasion of Ukraine led to rampant inflation and derailed growth following a series of interest rate hikes in response.
There have been few winners so far across asset classes following the conflict outside oil and the , which appears to have regained its haven status after a wave of the “Sell America” trade a couple of months ago, and partly at the expense of the price. The main indices in the US continue to track downwards in the absence of an obvious end to the war and in the year to date the , and have now fallen by 3.8%, 3.2% and 4.7% respectively.