Putin’s war puts Russia’s – and the world’s – economy in the crosshairs

Meet Dr. Pangloss’ evil twin, Vladimir Putin. In the mirror image of Voltaire’s character Candid, the Russian president is creating the worst possible world.

After failing to quickly subdue Ukraine with attacks on civilian targets, the bombardment of the Zaporizhzhia nuclear power plant by Russian troops early Friday raised the hitherto unthinkable specter of a nuclear incident that could affect the entire Europe. Indeed, Washington fears that the harsh sanctions imposed on the Russian economy have created a “cornered problem for Putin”, writes Greg Valliere, chief American policy strategist for


AGF Investments
.

Quoting what he called a “chilling” account in the New York Timeshe says the Russian president could double down and intensify his attacks in the coming days.

Against the background of the suffering Ukrainian people of Russian aggression, it is almost inappropriate to discuss the economic and financial results. While these two countries represent only about 3% of the world’s gross domestic product,


JP Morgan

economists see a war-induced commodity supply shock hitting the global economy in two ways, both bad.

The bank cut its estimate of annual global GDP growth through the fourth quarter of 2022 to 3.1%, a reduction of 0.8 percentage points since its February 18 forecast. It projects global consumer price inflation at a rate of 4.6% year-on-year over the same period, an increase of 0.9 percentage points from the previous projection. GDP growth for the U.S. economy could be cut by 0.1 percentage point, to 2.7%, while the CPI is expected to run at an annual rate of 4.9%, an upward revision from a whole point.

For Russia, JP Morgan expects an 11% drop in peak-to-trough GDP, in line with the collapse of the 1998 debt crisis. 2022 by 2.1 percentage points, to 2.5%, with consumer prices rising at a rate of 3.9%, an upward revision of 1.5 percentage points.

With Europe feeling the direct impact of the supply shock, it’s no wonder its stock markets have suffered most recently. the


Stoxx Europe 600

fell 7% last week and is down 10.18% over the past three weeks, its worst performance since March 2020, when the pandemic hit global markets and economies. After a rollercoaster week, the


S&P 500 Index

ended down 1.27% and down 9.75% from its record high in January. This essentially brings the large-cap benchmark back to where it ended the third quarter before its year-end rally.

Michael Wilson,


Morgan Stanley
it’s

the chief equity strategist, who has been among the most conservative on Wall Street, sees another correction. Downward corporate earnings forecasts were 3.4 times more common than upside, the biggest disparity since the first quarter of 2016, he wrote in a client note. Earnings forecast revisions have also turned less positive and are approaching negative territory.

And valuations remain stretched, Wilson continues, with the S&P 500 trading at about 19 times estimated forward earnings, which are expected to total $228.72, according to FactSet. By the end of the year, according to its baseline forecast, the S&P’s price-to-earnings ratio would fall to 18 times its expected earnings of $245, with the index itself at 4400, a modest 1.6% at the end of the year. above Friday’s close. His bearish case follows his “Ice Age” thesis, with a P/E at 17.3 times earnings of $225 and the index at 3900.

Looking at the price charts, generally bullish Evercore ISI technical guru Rich Ross writes in a client note that a break below 4250 on the S&P (from 4328.87 at the end of the week) would indicate a downside target in the 3800-3600 range, which would bring the benchmark back to its end-2020 level. Germany


DAX,

he notes, has already retraced his lead from this point.

The Treasury market also sent warning signals, especially with the continued flattening of the yield curve, a dreadful signal of an economic slowdown. The yield spread between two- and 10-year bonds narrowed to 25 basis points, or hundredths of a percentage, from 85 basis points in early January, amid growing belief that the Fed will raise the target federal funds rate this month.

During testimony to Congress last week, Fed Chairman Jerome Powell confirmed that he favored a 25 basis point increase from the current target of 0% to 0.25%. at next week’s policy meeting, essentially reinforcing what the fed funds futures market is now predicting. Expectations of higher interest rates have been gradually revised downwards, while the outlook for economic growth has deteriorated, with soaring prices weighing on the real purchasing power of consumers. The futures market sees the key rate capping at just 1.75%-2% next year, according to the WEC’s FedWatch site, versus the long-term neutral rate of 2.5% estimated by Fed officials. Not even Friday’s news of a much stronger-than-expected increase of 678,000 nonfarm payrolls in January changed those views.

Falling stock prices, soaring commodity prices and a flatter yield curve add up to the opposite of the brave new world the good Dr. Pangloss perceived.

Read more Up and down Wall Street: Oil prices are soaring. It’s time to hedge or sell.

Write to Randall W. Forsyth at [email protected]