Exposure rates of the Dorval Asset Management Range – 1st April 2022
Against a backdrop of downgraded economic growth projections, chiefly for the second quarter, the debate on the extent and duration of the slowdown rages on, particularly as growth momentum remains robust. For example, the acceleration in services spending in the United States in February (+0.6% in volume terms, cf. chart 1) has little reason to tail off, as it resolutely stages a catch-up after the dent from Covid. The services PMI survey surged significantly in the United States in March, and only slid back slightly in Europe. This is particularly significant as the services sector is by far the leading employer in the economy.
Easing health restrictions shore up services spending
US households’ spending on services (in volume)
Meanwhile, looking to the main ways in which the war in Ukraine impacts the economy – i.e. the price and availability of commodities – the latest news is unclear, with an improvement on the oil front but continued major questions on Russian gas.
The US administration plans to release some of its strategic oil reserves and provide a million barrels per day to the market for a period of six months from May onwards. Additionally, new transportation and pricing routes to Asia – including India – are propping up supply of Russian oil to the world economy. Lastly, the economic slowdown in China – exacerbated by fresh lockdowns in several provinces – is helping temper demand. Overall, oil prices are sticking below $120/130 (cf. chart 2), which is often viewed as the watershed point beyond which the world economy could face a much more challenging scenario.
Oil prices seem to have stabilized
However, considerable uncertainty remains on Russian gas. Putin’s demands to be paid in rubles obviously have no economic or financial grounding: Russia clearly cannot lack a currency that it can print itself. This move can thus only be seen as a threat to cut off gas supply to Europe as an act of economic warfare. European countries have started to prepare for this possibility next winter (cf. chart 3), but they cannot possibly completely replace this supply source at such short notice, no matter how well designed the plans. Meanwhile, Putin’s intentions remain very difficult to grasp, and Russia clearly needs this European revenue source.
Germany seeks to swiftly boost its gas inventories ahead of winter
In our international funds, we maintain moderate risk exposure, but we have added a tactical long position (futures) on European equities to go alongside easing tension on commodities and take on board the possibility of diplomatic progress on Ukraine. We have also taken steps to hedge against uncertainties in the French presidential election – a second round run-off between Emmanuel Macron and Marine Le Pen looks set to be close – by taking positions on the France-Germany 10-year yield spread.