Corporate America, the U.S. household balance sheet and a resilient American housing market have never been better despite the havoc created by the war between Ukraine and Russia, said Natixis Investment Managers.
In a webinar, Natixis portfolio strategist Garrett Melson noted that the U.S. Federal Reserve increased interest rates by a quarter of a percentage point earlier in the week, but despite some concerns about high inflation and the war in Ukraine, U.S. stock markets rallied at the close.
“Reactions to these types of events are more a reflection of sentiment and positioning coming in and sentiment was completely in the basement so it didn’t take much to get a bit of a rally,” acknowledged Melson.
Economic projections
He said a key takeaway from the Fed was a look at economic projections – which saw some upward revisions to inflation and growing risks like a higher unemployment rate – all pointing to a lot of uncertainty.
But the major issue driving the markets is the war in the Ukraine, which portfolio manager Jack Janasiewicz said was affecting many areas of the market, particularly commodities and oil.
Janasiewicz said Soviet President Vladimir Putin seems to be willing to come to the peace table, but also wants Ukraine to remain out of NATO.
Russia and the West
“These negotiations are not simply happening between Russia and Ukraine – you have to think of this as negotiations between Russia and the West,” said Janasiewicz. “That I think is a complicating factor because you have very different outcomes in terms of what some of these western countries are looking for.”
He said a lot of economies in Europe are intertwined with Russia and may be more in favour of pulling back sanctions aggressively because they’re starting to feel the pinch.
“At the end of the day we certainly are seeing progress moving in the right direction. The one thing I would note though: Is this just simply a stall tactic in the interim as we hear about these peace negotiations? It certainly seems Russia is still going on full force with their military onslaught and is this just a stall tactic in the interim?”
Melson said that back in the U.S., housing is a main positive force for the economy these days, despite fears of rising rates choking that off. He said recent data indicates that U.S. housing is more resilient to higher mortgage rates currently and millennials are demanding more housing.
Strength of the U.S. dollar
As well, Janasiewicz said the U.S. dollar remains the world’s most dominant currency, with 85 per cent of all foreign currency transactions completed in U.S. dollars and 40 per cent of all international payments still in U.S. dollars.
Melson said the U.S. is closer to recovering to pre-Ukraine-crisis levels whereas the remainder of the world is still mired in lower levels, although there could be a rally overseas.
“I think it’s a narrative for the back half this year where you may see potential for that European trade to get a little bit of runway. But I think right now the U.S. and quality continue to lead.”
