Cross Asset Investment Strategy - April 2022

The first month of the Russia-Ukraine war has driven volatility up across the board, though with some recent signs of stabilisation in equity markets. Europe is the area most exposed to the war – in particular, through the effects of higher energy prices, supply chain disruptions, and geographic proximity, but the commodity squeeze goes far beyond energy to include agricultural commodities and metals.

By calling the war in Ukraine a «tectonic shift in European history», European leaders are giving an indication of the regime changes this war could lead to in the medium term.

Valuations are now a little more attractive. However, the environment remains challenging, particularly in Europe. We remain cautious and more constructive on US credit markets relative to euro markets.

The Fed is determined to hike rates rapidly. In the short-term the US economy will be supported by the many cushions present in the economy, as a result of all the fiscal and monetary support provided during the Covid crisis. The Fed will be in a more difficult situation in 2023.

The French 2022 election cycle is starting in the context of the war in Ukraine which favours to the incumbent president. Structural reforms, notably of the pension system, and the energy transition are debated but the main topic is household purchasing power as energy and food prices are hurting low income households. The electoral turnout might be very low which usually helps far left or right candidates.

The first half of Emmanuel Macron’s term (from H2 2017 to the Covid outbreak, in Q1 2020) featured a significant number of “structural” or “supply-side” reforms, of the type generally considered favourable to long-term growth.

We keep the narratives and the probabilities of our central and alternative scenario unchanged versus last month. The war in Ukraine could evolve in several ways over the coming weeks (see Ukraine crisis tree) with significant implications on economic and financial markets.

Macroeconomic Picture by area and Macro and Market forecast.