ÃÛ¶¹ÊÓƵ

Recent market volatility highlights the uncertainty that prevails about where the markets go from here. The G7’s strategy of escalating sanctions is making it difficult for the market to stabilize, given uncertainty over countermeasures and potentially a much more significant disruption to global energy markets. Russia accounts for a quarter of global pipeline gas, 11.4% of global oil production and 8% of total LNG production, and even larger shares for the EU.

In our two scenarios for the global economic outlook we explore how physical shortages of energy could push Europe into recession whereas a ‘higher prices only’ scenario would weight on growth but essentially leave the recovery intact.

We assume 37% higher commodity prices (oil at $140/bbl till year end) which further drags down global growth but see few central banks abandoning their normalization path. So financial conditions tighten into an inflationary growth shock. Global growth lower by 0.5% over two years. 2022 returns 4-5% below the baseline. Equity markets will likely stay stuck at current lows through Q2 before starting a slow recovery. They will likely still post negative returns for the year. Despite weaker growth, US Treasury and Bund yields trade marginally higher as a rise in inflation expectations is somewhat larger and the rise in real yields is smaller relative to our baseline. With questions over what hard currency is, the future distribution of gold prices is likely positively skewed.

On the assumption of a 50% drop in Russian energy supply to Europe (equal to an 8% hit to overall European energy consumption), and oil peaking at $180/bbl, Europe goes into recession. The S&P 500 index shifts down to 3,750, Stoxx 600 to 360, and EUR to 1.05. While the S&P 500 should recover to above-current levels in Q4 2022, it does not return to end-2021 levels even by end-2023. Real yields decline more than break evens rise; US 10y yields likely fall to 1.75% and 10y Bunds to -15bp. US 2s10s inverts. HY spreads begin to widen aggressively pushing to a wide of 650bp in the US (>250bp widening from current levels) with Europe likely widening more.