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The Calm Before The Storm?

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March 28, 2022

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The quiet before the storm? We hope not.

Given everything that has been going on in the world this week, the lack of movement in either direction from the stock market is a little strange.

On one hand we’ve got the Biden administration officials who are worried that Russian President Vladimir Putin may lash out dangerously as Russian troops find themselves bogged down in Ukraine and Western sanctions begin to bite.

The internal assessment of senior officials, speaking on condition of anonymity, is that Putin’s tendency when boxed in is to escalate rather than back down. Their view is that the Russian leader’s choices could include the blanket bombing of Ukrainian cities or the use of chemical weapons -- or even tactical nuclear weapons.

On the other hand, some allied officials are reading Russia’s slow progress as good news. The Russian military has now said it’s focusing its efforts on taking full control of Ukraine’s Donbas region after a month of fighting that’s yielded limited territorial gains.

This might signal that Moscow, stymied by Ukrainian defenders and significant losses of troops and armour, is backing away from trying to take larger parts of the country. The area of eastern Ukraine is where Moscow has long fuelled a conflict between Kyiv and separatists that has killed at least 13,000 people since 2014, when Russia annexed Crimea from Ukraine.

One of the hardest challenges facing the U.S. and its European allies is trying to anticipate the next move of someone they see as behaving in an increasingly erratic manner and who they fear could become even more dangerous amid signs Russia’s military campaign has not gone according to plan. The failure to quickly overwhelm Ukraine’s military raises the risk of what Western intelligence agencies are calling “vertical escalation.”

NATO leaders on Thursday pledged to step up their defences against the threat of chemical and nuclear weapon attacks. In the lead-up to the emergency meeting in Brussels, National Security Advisor Jake Sullivan and Biden issued increasingly urgent public warnings, citing Russian disinformation as an indicator of what Putin may be planning.

One side of the argument suggests a slow road to a ceasefire and peace talks, the other leads to a nightmare not worth thinking about. Let’s hope that the worst case scenario doesn’t come to pass. It is also very likely that the best case scenario doesn’t either.

This conflict will probably go on for a fair while longer. The good news is the US and Europe will push to boost supplies of liquefied natural gas to European countries by the end of 2022 in a bid to displace some Russian gas. Under the agreement, Europe will get at least 15 billion cubic meters of additional LNG supplies by the end of the year. Whatever happens in the conflict, the outcome is not good for Russia as their economy will be knocked back decades.

Predicting the markets right now isn’t easy and has to be accepted as a long term game. Day to day, buying or selling could be dangerous. Putin could do something unpredictable which might send stocks tumbling, but at the same time, peace talks could yield a result that would have a dramatic effect in the other direction.

For investors, it’s best to look at the current price compared to the likely price in a year’s time; most European indices look very attractive at the moment so try not to over think the in-between. US stocks have actually already retraced any losses that were seen on the back of the invasion. The current losses across the pond actually stem from rising inflation and imminent increases to the benchmark interest rate.

Some risk has indeed been priced in, but I don’t think there is any way of pricing in the use of nuclear weapons, so are we better off putting our heads in the sand and hoping/assuming, that it won’t come to that? It’s hard to know the best thing to do, but what I can tell you is that the traders at TPP are treading carefully. There will be good days to come, but unpredictable geopolitical events are best treated with caution.

Here is a current update on global indices for 2022:

Germany: -9.94%
France: -8.38%
UK:  1.34%
Dow Jones -4.21%
S&P -4.83%
Nasdaq -9.52%
Japan:  -2.23%
Hong Kong:  -8.52%
China: -11.75%

Bitcoin:  -4.43%

It’s hard to ignore the only positive index. TPP have been saying for months how the FTSE would be the best bet for 2022 and it seems we were right – based on current valuations. The UK’s index has been under-priced for years, and there is still a long way to go for it to reach the dizzy heights of its counterparts – European as well as US.

For all those with the FTSE tracker, it has proven to be the best of the bunch, so well done. For those who added it during the early days of the crisis, you deserve your profits, as decisions to buy in the face of a falling market isn’t easy for inexperienced investors.

We have traded through every crises over the last 20 years so have become a little immune to the temporary pain some events can cause. Wherever there is panic, there is usually opportunity.

From here, we hope the conflict can be resolved. Quiet weeks in the market have become a rarity at the moment, rather than the norm, and I’m sure we’d all like volatility to decrease, and world order restored.

Enjoy the rest of your weekend and may next week bring us closer to the end of Putin’s awful war.

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