First quarter also witnessed the Federal Reserve tapering and ending their monthly bond purchase program, that at one point was buying $120 billion in fixed income. And on March 17th, the Federal Reserve raised Fed Fund Rates for the first time since the pandemic hit. Their 25-basis point hike was disappointing to many that expected to see a stronger move by the Fed.
The biggest headline during the quarter was the Russian invasion of Ukraine. While our initial reaction should obviously be about the humanitarian impact this unprovoked attack has had on tens of millions of people in Europe, it also wreaked havoc on the markets. The United States and our NATO allies have placed harsh sanctions on the Russians, and we’ve supplied the Ukrainians with weapons to defend themselves. Each of you is going to have a differing opinion if enough action was taken. What can be said is the Russian invasion and the subsequent sanctions have caused prices of oil, steel, nickel, lithium, and many other commodities that come from Russia and Ukraine have become extremely volatile and almost impossible to predict. Fears that Russia’s aggression could spread to other ex-Soviet states forced the markets down further, with losses reaching more than 13% intra quarter.
Uncertainty during the quarter spread when Russia threatened to escalate their attacks to include the possibility of chemical weapons and the possibility of nuclear weapons. Some news agencies hinted that the Chinese might use the Russian invasion as an excuse to attack Taiwan, as it would be very difficult for the United States and our NATO allies to defend both countries at once. There were even words like “third world war” used in several publications.
There have been several surprises since the Russians began their invasion of Ukraine. Most military experts have been surprised at the ineffectiveness of the Russian army. They have had logistical issues, their equipment has been breaking down, and they have fully underestimated the resistance shown to them by the Ukrainian people. Most experts would have predicted that the Russians would have overwhelmed the Ukrainian army and after a month of fighting would have taken over the country. As I write this article, the Russians have given up hope of capturing Kyiv, the Ukrainian capital, and are now concentrating on the pro-Russian separatist regions in eastern Ukraine.
The Russian stock market shut down after losing more than 50% of its value due to sanctions and the valuation of the Ruble. The Russian ETF ERUS (chart provided) dropped from $40 a share to $8 a share over a two-week period and stopped trading on March 3rd.