Solidarity’s positive spillover
08 March 2022
Market Insight by Belal Mohammed Khan
Reading time: 4 minutes
The recent developments in Ukraine are surprising, alarming, horrific. However near-global solidarity in support of Ukraine has also been a surprise. The roots of solidarity on display are not always clear. It may not always be for altruistic reasons. Regardless, without a doubt, the recent show of unity is indeed unexpected and extraordinary.
This near-global solidarity leads us to believe the outcome and end of this crisis may surface faster than most expect. Unfortunately, a resolution may not meet everyone’s needs. There will likely be ongoing grievances between the two sides, but at least the damage to life and property, we believe, could fade quickly and headwinds to the global economy ease. Both possibly may occur faster than most base case scenarios suggest.
The possible positive in this tragedy is a more significant and broader realization that nations must collaborate and cooperate in ways that we have not witnessed in recent memory. The degree to which we see this solidarity and its positive spillover play out and prove our theory correct or not will depend on several fronts including monetary policy, US – Venezuela, IAEA talks with Iran, and whether large grain and key commodity-exporting nations can coordinate to fill in the gaps left by Russia and Ukraine. The motivations for all mentioned to act are not the same. Still, the outcome would help reduce headwinds to the global economy and reduce the risk of political instability, especially in fragile and semi-fragile states.
While we always monitor monetary policy developments of central banks in major economies (US, China, Japan, Euro area, and the UK), this month and likely for several months to follow, we are also closely monitoring a much longer list of monetary policy meetings. Our idea that global solidarity being displayed since the start of the crisis is profound and will last is a theory that may be validated over this and the next few months. Our list of important central bank meetings to monitor now includes central banks of commodity-exporting and importing economies, from large economies to small and especially central banks of Eastern European nations. Will monetary policy divergence become more acute, or will central banks now decide to show solidarity in the face of this crisis and work to reduce headwinds facing the local and global economy?
If the public and political solidarity on display is carried over into monetary policy decision-making, global markets may get support or even a lift from a lack of or restrained monetary policy tightening. Our long list of central bank monetary policy meetings in focus includes from Poland March 8 to Colombia March 31 in addition to the Eurozone on March 10th and the US on March 16th.
Regarding energy supply disruptions, if Venezuela, with the highest proven oil reserves, can again more freely export oil, it will be a game-changer. Venezuela, coupled with Iran, can help ease the pain, and move oil prices significantly lower, quickly. However, both have been embroiled and held back by a barrage of sanctions. Perhaps now, with a need to diversify key commodity supply lines, both ostracized nations see opportunity and may become more flexible to get some sanctions lifted. While this may take time to play out, it is clear the International Energy Agency (IEA) stands ready to coordinate another possible sizeable release from emergency reserves.
Commodity flows from Ukraine and Russia have been disrupted, but other nations may be able to recalibrate production and distribution and fill in some or all the gaps. According to the UN, Ukraine is the fifth largest wheat exporter in the world, Russia is the world’s largest. Taken together Russia and Ukraine export about twenty-five percent of wheat. We believe some of the short-term pressure can be offset if governments such as the United States, Canada, Argentina, Australia, France, orchestrate and prioritize deliveries to countries most at risk from the disruption caused by the war. Food security issues can destabilize populations and nations very quickly, thus an urgent global response is needed.
From monetary to energy and commodity policies, a show of solidarity can reduce heavy headwinds facing the global economy and equally importantly help lift spirits, solidify this show of unity and create broad positive spillover across the global economy.
Indeed, the broad-based positive spillover can take time to materialize, however, we remain constructive and selectively risk-on and vigilant.
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