Globally, stocks sold-off as oil prices surged nearly 25% last week. Unsurprisingly, European stocks bore the brunt of the sell-off with the MSCI Europe USD index down a steep 9.6% as the region remains uniquely exposed to Russian energy supplies. The S&P 500 fared much better with the index dropping just 1.3%. The NASDAQ slid 2.8%. The MSCI Russia index tumbled an additional 38.6% last week – leaving the index a whopping 73.7% off its October 25th, 2021 high. The 10-year U.S. Treasury yield fell 12 basis points to 1.73% as investors sought the traditional safe haven asset.
Even without targeted sanctions, a large swath of Russia crude oil supplies have been sidelined, which is leading to a tighter oil market and soaring costs. The United States may stop purchasing Russia crude oil outright, but it would likely be more of a symbolic move with the U.S. importing just 3% of its crude oil from the region.
The ongoing geopolitical conflict will likely lead to at least several more months of higher inflation prints and could possibly result in a global supply shock if conditions don’t improve. Thus far, these rising risks have yet to deter the Federal Reserve with the central bank on track to hike interest rates by 25 basis points at its meeting next week. The European Central Bank will meet later this week.
Citi’s Global Investment Committee decided to add a 4% portfolio weighting to global natural resources as a defensive hedge. We also reinstated a 2.0% overweight to gold. These additions are being largely funded by a reduction in the portfolio allocation to both European and Japanese stocks. The Global Investment Committee will continue to closely monitor unfolding developments and take actions necessary to adjust to emerging risks and potential opportunities with our tactical investment horizon of 12-18 months.