Business & Investing: The markets bounced back from initial falls prompted by the Ukraine war, but the risks from a whole range of linked global economic uncertainties remains acute

What a difference a week makes.

This time last week markets looked poised to fall sharply lower after breaking below key support levels as hopes of a peace agreement between Ukraine and Russia failed to materialise.

A week on and its all ‘blue sky’ again as ‘buy-the-dip’ investors returned to the market en-masse to scoop up beaten down stocks.

Assurances by the Federal Reserve that it could manage spiralling inflation by hiking interest rates at a measured pace without endangering the US economic recovery, a growing sense of optimism that a resolution to hostilities between Ukraine and Russia was imminent and a rare statement from the Chinese government that it would step in to support markets, all helped to calm investors’ frayed nerves and give stocks a much needed boost.

As a result, the benchmark S&P 500 index enjoyed its biggest weekly advance since November 2020 gaining 6.2 percent, while the tech-heavy Nasdaq Composite rose 8.2 percent.

Meanwhile, European markets managed to recoup all their losses since the beginning of the invasion of Ukraine by Russia.

Locally, the NZX50 gained a more muted 2.9 percent, while across the Tasman, Australia’s ASX200 gained 3.3 percent for the week, though the NZ market is likely to begin the week strongly today following the positive market close in the US on Friday (US time).

Last week’s rally was also spurred on by comments from US president Joe Biden warning his Chinese counterpart, Xi Jinping of retaliation if Beijing actively supported Russia in Ukraine, though Antony Blinken, US secretary of state, cautioned there were no signs Putin was “prepared to stop” Russia’s invasion of its neighbour.

“The actions that we’re seeing Russia take every single day, virtually every minute of every day, are in total contrast to any serious diplomatic effort to end the war,” he said.

Analysts also expect big investors, including US pension plans, to begin switching from the safety of bonds in the coming weeks as they rebuild stock market positions, in a bid to maintain their long-term asset allocation strategies.

Headwinds could still trip up markets

However, the delicacy of the situation in Ukraine is likely to have many investors still feeling on edge and guarded in their outlook as extreme volatility continues to be a major theme of 2022 to date.

With the largest war on European soil for almost 80 years, the threat of escalation undermines confidence to spend, and the return of coronavirus to China once again threatens global supply chains, amplifying upward pressures on prices and downward pressure on output. These developments all undermine global economic prospects.

For those having difficulty interpreting all these challenging cross currents be assured even the supposed ‘experts’ are struggling. Mathias Cormann, head of the OECD, said this past week that the organisation was “not in a position to present” its usual global economic outlook for now.

Just a month ago, Christine Lagarde, president of the European Central Bank, presented an upbeat view of the eurozone outlook, predicting “growth should rebound strongly”. However, she now says recent events “posed significant risks to growth”, while Herbert Diess, the chief executive of Volkswagen, told the FT that a prolonged war in Ukraine risked being “very much worse” for the European economy than the coronavirus pandemic, due to supply chain disruption, energy scarcity and inflation.

Global supply chains have already been heavily disrupted by the pandemic and bottlenecks, but the war in Ukraine presents a fresh risk to the supply of key materials. For instance, Ukraine supplies 70 percent of neon gas, which is needed for the laser lithography process used to make semiconductors, while Russia is the leading exporter of palladium, which is needed to make catalytic converters.

And China’s top economic official, Liu He, was sufficiently concerned about the continued deterioration of China’s stock market to initiate a rare intervention last week, promising the government would “boost the economy in the first quarter”, as well as introduce “policies that are favourable to the market”. After Beijing’s pledge, the Nasdaq Golden Dragon, a China Index, jumped 33 percent, its biggest one day gain ever.

While there is a growing sense of optimism about a resolution in the Russia / Ukraine conflict, other macro themes including ballooning commodity prices, rampant inflation and higher interest rates are likely to keep markets in check.

There’s also the possibility this could be another false rally as occurred when the S&P 500 gained almost 6 percent between Jan 28 and Feb 2 only to fall a further 7 percent between Feb 9 and Feb 23. We’ve also seen similar retracements on the NZ market in recent months.

US Federal Reserve finally lifts its official interest rate

In its first rate hike in almost four years, the US Federal Reserve lifted its official interest rate by 25 basis points as expected and forecast six more hikes this year, which was more aggressive than investors and economists had been expecting. While the Fed reassured investors with its outlook, chairman Jay Powell admitted that his earlier forecast, suggesting easing supply conditions would soothe inflation, is yet to occur.

“The help we have been expecting, and other forecasters have been expecting, from supply-side improvements, labour force participation, bottlenecks [getting better] hasn’t come” he said.

In a more ominous warning signal to the market, the yield curve finished flatter. The 10-2 yield spread in the US is now just 25 basis points away from inverting, hinting at a higher probability of recession. The 10-year yield rose almost 8 percent for the week to 2.15 percent, its highest level in almost 3 years. Since the start of the year the 10 year yield has increased almost 35 percent.

Commodity markets ease while cryptos surge

Brent crude oil futures fell almost 4 percent to US$108 per barrel after trading under US$100 per barrel at one point last week, while the gold price also weakened 3.4 percent to US$1921 an ounce after almost completely erasing all its earlier gains for the month.

Bitcoin surged 11 percent last week to US$41,896 while Ether gained more than 16 percent to US$2900 as investors flocked back to cryptocurrencies in response to the improving risk outlook.

The NZ dollar gained 1.5 percent for the week to trade at 69.1 US cents, its highest level in almost 4 months.

GDP improves in final quarter

On the domestic front, gross domestic product (GDP) bounced back in the December quarter, growing by 3 percent after a 3.7 percent decrease in the previous quarter as Covid-19’s delta variant outbreak took its toll on the economy. Annual GDP growth for 2021 was 5.6 percent, the biggest annual increase since 1994, albeit off a lower base after the economy contracted by 2.1 percent in 2021 due to the extended lockdown.

Air NZ shares hit a 5-month low of $1.37 as the company prepares for a major capital raising supposedly before the end of the month, though no details have so far been provided, Port of Tauranga shares hit a three-year low of $5.96 last week, while out-of-favour Pushpay saw its shares surge almost 25 percent last week after Morningstar said in a note the company was significantly undervalued.



  • Overseas Merchandise Trade (Feb) – Stats NZ
  • Credit Card Spending (Feb) – RBNZ


  • The Warehouse Group Half Year Result


  • Kathmandu Half Year Result


  • New residential mortgage lending – RBNZ


  • Z Energy Special Shareholders Meeting
  • Regional GDP (y/e Mar ’21) – Stats NZ

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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