The first quarter was shaping up to be one dominated by talks of inflation and interest rate normalization creating some headwinds for markets in what looked like a manageable but tricky situation. Yet, that all changed on February 24th when Vladimir Putin, driven by a distorted sense of history, ordered the Russian invasion of Ukraine. We all watched in shock as cities were shattered, war crimes were committed, and the innocent were killed. It seems the world is again facing being goosestepped into darkness, yet this time it is a Russian goosestep. Yet, this aggression is bringing together the West and much of the rest of the world community, which has often been fractured, with a united, strong and forceful response. Most importantly we are witnessing the Ukrainian citizens clearly stating with their actions that they will not go quietly into the darkness. While the world faces challenges from this war, evidence continues to show signs of stabilizing for markets.
The substantial impact of the Russian invasion of Ukraine on the commodity markets is most noticeable with the jump in oil prices. Russia produces around 10% of global oil production and the uncertainty of Russian oil sales and sanctions significantly impacted the oil markets. While much of the initial jump in prices after the invasion subsided by the end of the quarter, an uncertainty premium remains. We anticipate a continued elevation of oil prices yet do not expect a significant shortage of oil as it is still legal to buy Russian oil. Mechanisms are being put in place by a number of major oil consumers in emerging markets to continue the flow of Russian oil. Obviously, depending on the length and brutality of this war, things could change but for now Russian oil is and will continue to be on the markets.
The Russian invasion also impacted a large number of other commodities as well. Ukraine and Russia are some of the world’s largest wheat exporting nations. The impact of both sanctions and uncertainty about the Ukrainian planting season created inflationary pressures in grain markets around the world. The impact of these pressures is being felt in emerging markets where protests are developing around rising food costs. This is also putting pressure on government budgets in emerging nations because of subsidies for food staples. All of these inflationary pressures increased the challenges on central banks around the world. As the world is rebounding from the 2020 recession and continues to deal with lingering supply chain issues, it now faces greater inflationary challenges.
Yet with all of these challenges, we see signs of resiliency and hope. Markets and the economy continue to move ahead in this challenging environment. Accommodative policies globally continue to provide a tailwind. US consumers remain financially healthy which serves as the bedrock of the US and, to a large extent, the global economy. The unity of the West and a broad range of allies in the face of Russian aggression is hopeful. The show of unity provides strength for the rules-based global order which is a major underpinning of economic stability and investment growth. Finally, we are seeing a leveling off of both shipping costs and consumer spending which could have a cooling effect on inflation going forward. The world has been challenged this past quarter yet continues to grow and we remain hopeful that it can withstand this Russian shock.