Commodity surge adds to inflation problem

Last Week in the City provides a round-up of the market movements and the global investing outlook. This covers week ending 4 March 2022.

| 9 min read

Russia’s brutal actions in its war on Ukraine continued to create a humanitarian crisis in Eastern Europe – and send shockwaves through the global financial system. As civilian and military casualties mounted, Russia leader Vladimir Putin stood firm in his aggression, with his posturing sending commodity markets sharply higher. Gains in energy and food prices are likely to boost already-elevated inflation worldwide – at the same time as depressing growth, as disposables income are squeezed.

Although oil, gas and wheat were the main cause of concern, gains have been recorded across most commodities. Global raw materials prices, as measured by the S&P GSCI index, are set to record their largest weekly leap in more than 50 years. The index is broad-based and includes energy, industrial and precious metals, as well as agricultural products and livestock.

These commodity-price rises are expected to boost already-elevated global inflation and cause a headache for central banks as they attempt to cool price rises without damaging growth. Any false move could hit output and result in a period of stagflation. It has been estimated that average UK energy bills could hit £3,000 a year because of the impact of the war, further squeezing hard-pressed consumers, the main driver of growth.

The Russian central bank more than doubled interest rates to 20% from 9.5% to halt a 30% slump in the rouble. The currency was sent into freefall following sanctions that cut off major Russian banks from Western financial markets. Russian citizens have been banned from transferring money out of Russia, including any capital for debt repayments. Nevertheless, Mr Putin insists the country has the reserves to ride out these sanctions.

The euro had its worst week in two years against the dollar, the war in Eastern Europe and concerns about elevated gas and other commodity prices hit the single currency.

Global stock indices moved sharply lower. The blue-chip FTSE 100 index was almost 6.1% lower over the week by mid-session on Friday, with the more UK-focused FTSE 250 down 6.7%.


Brutal attacks in residential areas have allowed Russian forces to tighten their grip on south-east Ukraine. In a television address, Vladimir Putin was belligerent, despite the mounting casualties, and said he would never give up his conviction that Russians and Ukrainians are “one people”. However the Ukrainian Army is holding Putin back.

China and Russia are natural partners, both antagonists to Washington

China continues to be a supportive partner to Russia, but the invasion has put Beijing in an awkward position. China and Russia are natural partners, both antagonists to Washington – with China a manufacturing powerhouse but a resource and energy-poor nation, with Russia being rich in commodities but requiring investment to broaden its economy away from cyclical commodities. However, China’s foreign policy stresses respecting sovereign borders, which is in line with its own “One China” policy that still sees Taiwan as integral to the nation. Beijing has also invested heavily in Eastern Europe through its Belt and Road initiative and its support for Russia risks a turn in sentiment in formally welcoming nations. Chinese state banks have been restricting financing to Russian companies, but the official line from Beijing remains that Washington is at fault after pushing NATO borders so close to Russia it backed Moscow into a corner.

Following Russia’s invasion of Ukraine old alliances have been reinvigorated – and self-sufficiency and economic nationalism have moved up the agenda. But these are inflationary too.


A fire ignited by a shell in the complex that houses Europe’s largest nuclear power station alarmed markets in Asian trade on Friday. The blaze at a training centre at the Zaporizhia plant in Ukraine was extinguished after Russian forces seized the plant. Oil prices spiked to near $120 a barrel at the height of market concern.

US futures markets saw a surge in bullish oil positions as Russia, which accounts for 8% of the global export market, struggled to sell its crude. Sanctions do not explicitly target the oil industry, but crude buyers are still unwilling to commit to purchases from Russia, afraid of potential repercussions. The oil market was being kept tight by Opec and others before the start of the war, so supply-side concerns are elevated. However, the head of the International Atomic Agency said he was heading to Tehran on Saturday, raising hopes that a deal could be agreed soon that would allow Iran to sell more of its crude in global markets, which eased some supply pressures. The EU said it planned to more than double the amount of gas in storage next winter via subsidies, as it attempts to become less reliant on Russian gas.

Wheat futures leapt about 40% in Chicago over the week to a 14-year high, as Russia and Ukraine together are responsible for 30% of world production. Ukraine has said that its Black Sea ports will remain closed until the Russian invasion ends, so there will be no wheat exports from Ukraine for an indeterminate length of time. The price of wheat substitutes such as corn also jumped. Russia is the world’s largest exporter of fertiliser, with the manufacturing process requiring a significant amount of higher-priced natural gas. Urea fertilizer prices are up by about a third since the invasion began.


Sanctions against Russia are hitting western businesses too. European banks are heavily exposed to Russia, with France’s Société Générale potentially losing most. SocGen’s management warned it could be stripped of its Russian businesses, as it valued the bank’s Russian exposure at $20bn. This was significantly lower than US bank Citigroup, which warned it risked losing about half of its $10bn investment in the country. Dutch bank ING

said it had $770m in outstanding loans that had been “affected” by new sanctions. Deutsche Bank may now lose a quarter of its investment bank IT specialists, should sanctions cut off its technology centres in St Petersburg and Moscow.

Ukraine supplies about 50% of the world’s neon gas, used in the chip-manufacturing process.

A growing number of companies suspended their activities in Russia including Burberry, which has a flagship store in Moscow’s Red Square, Apple, H&M, IKEA and Jaguar Land Rover. Russia was Europe’s fifth-largest retail market in 2021, valued at £337.2bn. Warner Bros suspended new film releases and oil companies such as Shell and ExxonMobil pledged to cut their Russian investments.

The war may further pressure semiconductor groups, as Ukraine supplies about 50% of the world’s neon gas, used in the chip-manufacturing process. It is produced as a by-product of Russia’s steel industry before being purified in Ukraine. Chip groups have reserves of the noble gas to release but struggle to find supply outside Ukraine.

The London Stock Exchange suspended trading in 36 companies with strong Russian links. These included high-profile businesses such as Gazprom, Lukoil, Norilsk Nickel, Sberbank and Rosneft.


All Covid-19 rules in Wales will be scrapped on 28 March, the last member of the Union to unveil its plan to move beyond the pandemic.

Covid-19 cases and deaths continued to fall globally, according to the World Health Organisation (WHO). Overall weekly cases fell 16% and deaths dropped by 10%, the WHO said. Some Covid-19 hotspots remain. The countries that reported the most cases were Germany, South Korea, Russia, Turkey and Brazil. Hong Kong remains in strict lockdown as the Omicron variant continues to spread rapidly, although it reached the former British territory later than other regions.


UK shop prices rose at their fastest rate in more than a decade in February, according to the British Retail Consortium. The BRC-NielsenIQ price index jumped 1.5% month-on-month, the highest monthly rise since November 2011.

Japan’s next central bank governor needs to be someone that understands the need to work with the government to beat deflation, Prime Minister Fumio Kishida said. Japan has struggled to reflate its economy, with its ageing population more focused on saving than spending.

Turkey’s annual inflation rate is now almost 55%, its highest rate in more than 20 years, with food and energy prices leading the charge after the lira was devalued. Leader Recep Tayyip Erdogan has declared himself “an enemy of interest rates” and has forbidden the country’s central bank from raising interest rates from 14%.

Environmental, social & governance (ESG)

The UK will miss its net-zero targets because the government has failed to introduce credible plans to drive investment towards key alternative technologies, according to a report by the House of Lords industry and regulators committee. It said ministers had not explained how the transition will be funded or what policies or financial incentives they will use.

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Commodity surge adds to inflation problem

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