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The war in Ukraine and China’s Covid lockdowns are stalling the world economy: May 2022 Market Commentary

Market Context: The war in Ukraine and China’s Covid lockdowns are stalling the world economy

Global Macro:

  • War in Ukraine: The continuation of the war and the mounting tensions between Western nations and Russia are increasing pressure on energy prices, which contributes to global inflation, while derailing economic growth in Europe in 2022.
  • China’s Covid lockdowns: Services and manufacturing activity in China is declining as Covid lockdowns in Shanghai and other cities paralyze economic activity and contribute to supply chain disruptions, impacting China’s trade partners. The decline in domestic consumption in China is also affecting growth globally.
  • Inflation has reached 8.5% in the US and 7.5% in Europe, while remaining at 1.5% in China. Inflation may be close to its peak as China is expected to be fully reopened for business in the quarters to come and central banks fighting high inflation – in particular in the US and Europe – are starting their interest rate hiking process.
  • Central banks’ actions: The US Federal Reserve has announced a series of rapid interest rate hikes to bring down inflation, starting May 4th with a 50-bp Fed funds rate increase from the [0.25%; 0.50%] range to [0.75%; 1.00%]. The US Fed funds rate may reach 3% this year (currently 0.33%). The European Central Bank (ECB) may raise its deposit rate from -0.50% to zero later this year.
  • China’s new economic stimulus: President Xi Jinping reaffirmed that China’s 5.5% growth target for 2022 must be met. The government will support the development of Tech companies in China, while the People’s Bank of China (PBoC) may lower interest rates to boost consumption and economic growth, as well as support weakened real estate and financial firms. Despite Covid restrictions and US sanctions, China’s exports have increased 15% over the past 12 months, reaching a new high in March at US$300bn.
  • Global growth: Corporate earnings are rising around 8% this year in Western countries and northern Asia, which should help avoid a global recession.

Financial Markets:

April was the most volatile month since the start of the Covid crisis in 2020.

  • Currencies: The USD strengthened significantly against most major currencies, playing its role as a safe haven on the back of the Ukraine war, China’s Covid lockdowns, and the US Fed interest rate hiking program. As a result, USDRMB reached 6.68 (+5% since early April) and EURUSD fell to 1.05 (-5%). We expect this move to reverse when a ceasefire takes place in Ukraine, as the US trade deficit is reaching a new all-time high at -US$90bn per month (vs an average monthly trade balance of +US$70bn in China over the past 12 months).
  • Equity: The US market led the equity sell-off with the S&P 500 and Nasdaq 100 plunging 9% and 14% in April, respectively, while European and Asian stock market declines were moderate at around -3%. The US equity sell-off was mostly triggered by investor fears that rate hikes would lower the valuation of high-price-earnings-ratio firms in the US.
  • Fixed Income: The US yield curve shifted up 50 bps with the 2-year US Treasury yield reaching 2.70% and the 10-year yield reaching 2.95%.

Equity: All major equity indices contracted in April, with S&P 500 down 8.9%, Euro Stoxx 50 down 2.6%, and HSCEI down 3.0%. Fixed Income: The 10-year US yield climbed 56bps to 2.89%, which had a negative impact on Emerging Market government bonds (-6.8% in USD; -6.1% in local currencies) and High-yield corporate bonds (-3.4% in USD and EUR). Currencies: The USD strengthened against all major currencies: EUR -4.7%, AUD -5.6%; CNY -4.2%; safe-haven JPY -6.6%, CHF -5.4%. Commodities: Gold edged down 2.3% while oil prices rose 3.0% amid growing global uncertainty.


  • Russia-Ukraine war escalation: A worsening of the war would affect Europe the most, while the US and Asia could suffer a stronger economic slowdown amid surging commodity prices.
  • Omicron variant: New waves of infections caused by the Omicron variant could weigh on the economic growth outlook.
  • Sustained inflation: Lasting inflation would induce central banks to tighten their monetary policy faster than expected, leading to higher interest rates and a compression of equity stock valuations.
  • Commodity price surge: Commodity mining and supply chain disruptions as well as the lack of new investment in energy sectors, like oil over the past five years, are causing supply to lag demand, leading to rising prices and contributing to higher inflation.
  • US tech bubble & corporate tax hike: Tech stocks are under pressure, given rising long-term yields, the highest valuations since the dot-com era, and high market concentration, while we expect the Biden administration to challenge tech companies’ light taxation and push through anti-trust legislation in the US.
  • US-China tensions: US-China trade frictions remain strong, with increasing tension around Taiwan and the South China Sea. In addition, the US is increasing pressure on Chinese companies listed on US stock exchanges by implementing stricter rules targeting Chinese firms, effectively leading to the delisting of Chinese stocks from US exchanges in favor of Hong Kong and Shanghai. We expect this to result in increased volatility in the coming months.


  • Floating-rate safe cash deposits: Cash can be placed in safe-haven cash deposits and earn US Fed funds rate +0.80% (close to 1.2% currently) net annualized in USD or 3% net annualized in RMB. •0.50% discount on the offshore renminbi in Hong Kong: Due to the large currency move in April, RMB can be bought offshore in Hong Kong with a 0.50% discount compared to onshore RMB in mainland China.
  • Chinese equities: The Chinese stock market has strongly underperformed Western equities in 2021 and 2022 amid US-China tensions and increased Chinese regulation on tech firms, with Chinese tech stocks plunging 60%. However, we think the downside risk from here is moderate as the Chinese government and PBoC pledged to support the economy in order to reach China’s 5.5% growth target in 2022.
  • Financials: We believe the financial sector will continue to benefit from higher yields, but also from stronger growth via a reduction in nonperforming loans and the positive impact from lower loan provisions on earnings revisions. We think stocks of well-capitalized quality banks in the US, Europe, Hong Kong, and Japan will go back to paying above-market dividend yields.
  • Oil & Gas: The energy sector is a major beneficiary of the global recovery, since long-term anticipated oil demand remains robust. Moreover, we are seeing increasing interest from investors towards major energy players that are implementing green energy programs to transition from fossil fuels to clean, sustainable energy production, thus making them major decarbonization contributors.
  • Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.