February 2022: the devil is in the (de)tail

At first glance, February 2022 seemed very similar to January on the financial markets, with higher yields on government bonds and lower equity prices. Although Russia’s invasion of Ukraine meanwhile created a new dynamic, it mostly translated into greater volatility.

Until mid-February, fears of inflation and, further to that, the threat of higher interest rates dominated the financial markets in 2022. The threat of Russian troops on Ukraine’s border was, at most, an event risk lurking in the background. While government bond yields had been rising steadily since December 2021, accelerating in the first half of February, global equity prices have been under pressure since the beginning of 2022.

The recognition of the two ‘people’s republics’ in the Donbas region in Ukraine by the Russian regime of Vladimir Putin on 21 February, and especially the subsequent large-scale military invasion of Ukraine by Russian army units on 24 February, sent shock waves throughout the financial markets. This is particularly reflected by the sharp increase in volatility, as measured by the ‘VIX Index’, for example. Towards the end of February, this index reached its highest level since the COVID-19 outbreak, now two years ago. As expected in a risk-off environment, government bond yields fell whereas equity prices showed a more mixed picture. European equity prices in particular dropped slightly in the last week of February, but went up in other regions. The prospect that there might be fewer central bank rate hikes than previously expected probably cushioned the impact of greater geopolitical risks.

On balance, February’s price movements on European and US stock exchanges were not that different from those in January, with monthly returns of 3.0% for MSCI Europe and -3.4% for MSCI North America. Emerging markets also shared in the malaise, delivering a monthly return of 3.5%. The Russian equity market plummeted by a third, measured in roubles, and even shed half its value in euros. Asian equities performed relatively well, with the MSCI Asia Pacific index posting a monthly return of 1.7%. European listed property can also look back on a relatively good month ( 2.2%).

As bond market yield rises in the first three weeks of February exceeded the yield drops in the last week of February, European government bonds yielded a return of 1.9%, corporate bonds 2.5% and the riskier high-yield corporate bonds 2.9%.