The possible evolution in the future depends on two aspects: 1) whether the situation will escalate further in the short term, such as the outbreak of further full-scale conflicts and the further expansion of sanctions against Russia by the United States and European countries; and 2) in the medium term, the extent of the impact of collateral losses, such as global price and monetary policy constraints on oil, gas and agricultural prices.

For markets where fundamentals are not directly affected by it, such as China, the indiscriminate sell-off simply because of risk aversion releases pressure in other areas, so once the situation eases or provides better opportunities for re-intervention, especially Hong Kong stocks, which are already undervalued. For US stocks, the Fed policy path is still a major variable and is now superimposed with geopolitical risks, resulting in large fluctuations, but this is also tantamount to releasing some of the pressure to worry about austerity ahead of time. In the medium term, earnings are still the most important support of the market. For US Treasury interest rates, there will be short-term safe-haven demand, but will be constrained by tightening expectations.

Abstract

The latest developments in the situation in Russia and Ukraine include three key words: the obvious deterioration of the situation, the expansion and escalation of sanctions, and the fierce risk aversion of the market.

The situation in Russia and Ukraine has obviously deteriorated, much more than expected.Since Russia recognized the independence of two regions in eastern Ukraine, the situation further escalated in the early morning of February 24 local time. The latest development is that Russia has launched a military operation against Ukraine, a change that happened almost without warning and thus exceeded expectations.In response, the United States, the European Union, Britain and other countries have adopted sanctions(including sovereign debt, Beixi 2 project, trade, etc.), and is likely to be further expanded. In this context, the reaction of the global market is very intense, showing three characteristics: 1) a sharp decline in risk assets, especially the growth style; 2) a rise in safe-haven assets such as gold, dollar index and bonds; and 3) a sharp rise in assets with supply premium. such as Brent oil prices exceeding 100 US dollars per barrel, wheat and so on.

Five influence and transmission paths of the situation in Russia and Ukraine: risk preference and capital flows, commodities and monetary policy, and sanctions themselves

First, risk preference and capital flow: risk aversion comes first, and the magnitude and time of impact depend on the degree of conflict.Generally speaking, geo-conflicts are sudden and unpredictable, so when the market is not prepared and unable to accurately predict the future trend, the most direct response is to avoid risk first, as is the case with previous experience.But how long and how much it lasts depends on the scale and extent of the conflict itself, unless it leads to a chain reaction, such as inflationary pressures caused by the oil crisis in the 1970s.After comparing asset performance and capital flows during typical local conflicts since the 1990s, we find that: 1) risk appetite will be suppressed in the short term; 2) emerging markets will be more affected on average, with the exception of regional direct conflicts. 3) generally not particularly significant and relatively short duration; 4) mostly pulse type, do not change the original trend, quickly rebound after the conflict to repair lost land; 5) there is also a short-term capital flow into bonds to avoid risk.

Commodities: supply premiums bring upside risks.Russia plays an important role in the global supply of some resource goods (energy, natural gas and some agricultural products), so if this leads to the "joint and several losses" of the supply gap of some capital products, the impact of the latter may be much greater than the impact caused by risk appetite in the short term.1) crude oil:According to the CICC Commodities Group, if Russian oil supply is reduced by 2.5 million barrels per day, oil prices could be as high as $120,000,000 per barrel ("oil: both sides of the" standing coin "). We estimate or raise US CPI by an additional 0.1 percentage point month-on-month, which will increase market concerns about Fed tightening and push up interest rates on US debt by raising inflation expectations (currently 2.66 per cent, historically 2.7-2.8 per cent).2) Natural gas:The uncertainty of Nord Stream 2 may further aggravate the shortage of European energy market, which in turn affects European inflation and even monetary policy. 3) the escalation of the situation in Russia and Ukraine may lead to concerns about global food prices and security, such as wheat and corn.

Third, monetary policy: the game between risk aversion and inflationary pressure.For the Fed, risk aversion from short-term financial market turmoil and further inflationary pressures from a potential rise in commodities in the medium term are two opposing forces. We tend to thinkUnless it is further systemic out of control, it will be difficult to change the near-end interest rate hike probability significantly, which is also illustrated by the limited decline in CME interest rate futures in March.Therefore, it may still be a high probability event to start raising interest rates in March and give a contraction table path, except that 50bp expectations for rate increases have fallen sharply ("if the Federal Reserve raises interest rates once 50bp").But one potential risk is that if subsequent commodity prices continue to rise, it will push up expectations of distant interest rate hikes and increase fears of a faster decline in future growth, which will not only increase the risk of "stagflation". It will also make it more difficult for the Fed to operate monetary policy.The influence of interest rate transmission can be seen from the accelerated interest rate hike in the interest rate hike cycle from 1994 to 1995, the oil crisis in the 1970s, and the interest rate trend after several recent geo-conflicts led to the rise of oil prices. The market pricing for this is currently inadequate and may require greater compensation.

Fourth, the fundamental level:Whether the global demand caused by the geographical situation, especially the demand fluctuations related to Europe, affect China's economic growth through external demand and import and export trade. As Europe bears the brunt, the follow-up response from European countries is crucial.

Sanctions themselves: Russia's exposure to foreign debt and exchange rate, as well as exposed enterprises.Sanctions against Russia's financial system, such as sovereign debt, and reduced pressure on exports on the current account could increase external debt service and exchange rate pressures. Russia's foreign debt ratio is not high (25% of GDP, with 19% of non-financial enterprises), but the exchange rate depreciation and the surge in sovereign debt CDS also reflect market concerns. In addition, it is also interesting to see whether companies with exposure to Russia will be affected.

The future may evolve: risk aversion is dominant in the short term and chain reaction in the medium term.

The trend of the situation in Russia and Ukraine in the short term remains the most important variable, and judging the further impact depends on two aspects:1) whether the situation will further escalate in the short termIt is reflected in whether further full-scale conflicts break out, and whether the sanctions imposed by the United States and European countries on Russia are further expanded.2) the influence degree of joint and several losses in the medium term.For example, through the price constraints of oil, gas and agricultural products on global prices and monetary policy.

For markets where fundamentals are not directly affected by it, such as ChinaIn a sense, the indiscriminate sell-off of risk aversion releases pressure in other areas, so once the situation eases or provides better opportunities for re-intervention, especially Hong Kong stocks with low valuations, it is China's own policy strength that is the key ("re-discussion on the meaning and enlightenment of the reverse of the Sino-US policy cycle").For US stocksThe policy path of the Federal Reserve is still the main variable, and geopolitical risks are superimposed at present, resulting in large fluctuations.But this is also tantamount to releasing some of the pressure of worry about austerity ahead of time.. Whether it can be stabilized after breaking through the key support level in the short term without triggering more risks because of the decline itself is key, but in the medium term, earnings are still the main support of the market.For interest rates on U.S. TreasuriesThere will be safe-haven demand in the short term, but it will be constrained by tightening expectations. We maintain a range of 1.8-2%, and if we raise interest rates, 50bp may be 2.3-2.4% higher ("if the Fed raises interest rates once 50bp").

Text

The latest developments in the situation in Russia and Ukraine: obvious deterioration, expansion of sanctions, market risk aversion

The situation in Russia and Ukraine has obviously deteriorated, greatly exceeding market expectations.Since Russia announced its recognition of the "Donetsk people's Republic" and the "Luhansk people's Republic" in eastern Ukraine on February 21, 2022 ("the situation between Russia and Ukraine has escalated, pay attention to the chain reaction"), the situation in Russia and Ukraine has further escalated in the early hours of Thursday morning local time. In the latest development, Russia has launched a military operation against Ukraine on Feb. 24, with bombings or missile attacks on some key Ukrainian cities, including the capital Kiev, according to CNBC. Russian President Vladimir Putin says the main purpose of the military operation is to disarm Ukraine (demilitarization), but there is no occupation plan.[1]. Although Russia's recognition of the independence of the two regions in eastern Ukraine has surprised the market, direct military action against Ukraine still exceeded market expectations and happened almost without warning. As a result, the situation has obviously escalated and deteriorated compared to the previous situation.

In response, countries such as the United States, the European Union and the United Kingdom have also adopted new sanctions, which are likely to be further expanded according to current reports.The specific measures are:

1) the United States announced economic sanctions against Russia and cancelled its meeting with Russia in Europe on the 24th.The White House said the sanctions would apply to VEB, Promsvyaz bank, Russia's sovereign bond market and Russian elites, freeze the assets of sanctioned financial institutions in the US and ban US individuals and companies from investing in Russian sovereign bonds in the secondary market.In addition, the United States decided to impose sanctions on the companies involved in the Beixi No.2 pipeline.[2]。

2) on the 23rd, the EU imposed sanctions on 27 individuals and entities, including the Russian Defense Minister.Prohibition on the purchase and trading of newly issued Russian sovereign bondsFreeze the assets of three Russian banks and exclude them from the EU marketAt the same time, imports and exports from Donetsk and Luhansk to the European Union are prohibited.. The German side said on the 23rd that it had decided to suspend the Beixi II project indefinitely.[3]。

3) British Prime Minister Johnson said that he would impose sanctions on five Russian banks and three Russian businessmen, freeze the assets of the sanctions targets in the UK, prohibit the persons involved from travelling to the UK, andBritish individuals and entities are prohibited from dealing with the subject of sanctions.At the same time, Johnson said Britain will introduce more sanctions against Russia.[4]。

4) Japan announced on the 23rd that it would impose sanctions on Russia.Ban the import and export trade between Japanese individuals and entities and the Donetsk and Luhansk regions, and prohibit the circulation and trading of newly issued Russian sovereign bonds in Japan[5]。

5) South Korea also indicated that it would join the ranks of international sanctions against Russia.[6]

In this context, the reaction of the global market is very intense, showing an obvious risk aversion transaction attribute.It has the following characteristics:1) risk assets plummetedRussia's MOEX index, which bears the brunt, fell 50% at one point, resulting in a ban on short selling by the central bank.[7]All trading was halted at one point before the opening of morning trading. Global stock markets generally fell sharply, with major European markets falling by more than 5%, Asia-Pacific major stock markets falling by about 2%, and US stock pre-market futures fell by 2% on the basis of their 2% drop the day before. Among them, the growth style of high valuation fluctuates more obviously, such as the NASDAQ index of US stocks and the Hang Seng Technology Index of Hong Kong stocks, which are mainly affected by risk appetite and high valuation.2) the hedge assets have risen sharply.Gold broke through the $1970 / oz mark, the 10-year US debt interest rate fell to 1.86%, and the dollar index rose more than 97%.3) assets with supply premium have risen sharply.For example, Brent oil prices exceeded 100 US dollars per barrel, wheat rose 6 percent, and so on.

Chart 1: Russian-Ukrainian conflict timeline and asset performance since 2013

Chart 2: the global market reacted very strongly this week, showing a clear nature of safe-haven trading (data available as of February 24)

Chart 3: from the perspective of US stocks this week, the auto, retail, media and technology hardware sectors led the decline, while the medical equipment and energy sectors declined relatively less.

Chart 4: there has been a sharp rise in supply premium assets this week, such as Brent oil prices exceeding $100 per barrel, wheat up 6%, etc.

Chart 5: under the influence of risk aversion, the interest rate on 10-year US bonds has fallen back to 1.85%, and the price of gold has exceeded $1970 per ounce.

Figure 6: stock market risk premiums in all major markets have risen recently, but emerging markets have higher equity risk premiums than developed markets.

The influence path and Transmission Logic of the situation in Russia and Ukraine: risk preference and Capital flow, Commodities and Monetary Policy, sanctions themselves

Risk preference and capital flow: risk aversion comes first, and the magnitude and time of impact depend on the degree of conflict.

Generally speaking, because geo-conflicts are sudden and unpredictable (this is a typical case), when the market is not prepared and unable to accurately predict the future trend, the most direct response is to avoid risks first.In turn, it promotes the rise of risky assets and the decline of safe-haven assets, as has been the case in history. However, the duration and magnitude of the impact depends on the scale and extent of the conflict itself.Geo-conflicts alone are generally not the dominant factor in market trends and tend to be repaired quickly after they are over, unless it leads to a chain reaction.For example, the pressure of oil prices on inflation and tightening, as well as the inflationary pressure caused by the oil crisis in the 1970s.

We compare the typical local conflicts since the 1990s, especially the global market and asset performance and capital flows involving major powers such as the United States and Russia, such as the September 11, 2001 and the subsequent war in Afghanistan, the Iraq war in 2003, and the conflict between Russia and Ukraine triggered by the Crimean crisis in 2014. In September 2014, the United States began air strikes on IS in Syria; in 2016, the US Navy directly attacked Houthi targets for the first time; in April 2017, the US Navy directly attacked Syria; in August 2017, the Korean crisis; in 2019, India attacked Pakistan; in 2019, the US attacked IS leader Bagdadi; in January 2020, the US air strike on Iran, etc. ("how does geopolitical risk affect asset prices? February 14-20, 2022"), found the following rules:

First of all, without exception, the outbreak of geo-conflicts will depress risk appetite in the short term, resulting in the benefit of safe-haven assets and the damage of risk assets.Judging from the historical experience we have summed up above, when conflicts occur (usually within a week to a month), global stock markets fall under some negative shocks, long or short, while safe-haven assets such as bonds, gold and the yen benefit relatively.

Secondly, among different markets, except that Europe was the first to bear the brunt of the Crimean crisis in 2014, emerging markets as a whole were more affected than developed markets.This is mainly because emerging markets have higher risk premiums than developed markets. However, when the conflict is over, the rebound in emerging markets is also more pronounced. This time, because Europe is still the first to bear the brunt, European stock markets have also fallen more.

Third, from the impact degree and duration, in general, the impact of local conflicts on major assets will not be particularly significant and the duration is relatively short.In the above-mentioned cases, except that the September 11, 2001 incident caused a broader panic because of the direct attack on the United States (developed stock markets fell by an average of ~ 5%, emerging markets fell by as much as ~ 10%) and affected the market for a longer time, the other times were measured on a weekly basis, and the market usually fell by about 5% during this period.

Fourth, from the perspective of the influence mode, the impact of local wars is often impulsive and will not completely change the original trend.Therefore, after the crisis and conflict, all kinds of assets will rebound quickly and repair the lost ground.

Fifth, from the point of view of capital flowLocal conflicts, especially those involving Russia and the United States, have seen interest rates on Chinese and US 10-year government bonds fall in the next week and two weeks.Corresponding to the accelerated inflow of funds into the bond market; and the rise in risk aversion brought about by the outbreak of the conflict also led toThere will be pressure on capital outflows from Chinese and US stock markets in the coming week and two weeks.This is also the direct embodiment of hedge trading.

Figure 7: performance of major global markets and asset prices before and after typical local wars over the past 20 years

Figure 8: capital flows in the Sino-US stock and bond markets after the outbreak of a typical local war in the past 20 years

Commodities: supply premiums bring upside risks

Judging from the general law of geo-conflict above, if the tension between Russia and Ukraine is only local and short-term, the impact may only be more limited to short-term risk appetite. However, the difference this time is that because of Russia's important role in the global supply of major resource goods, such as energy, natural gas and some agricultural products (of the global production of about 98 million barrels per day by the end of 2021, Russia accounted for 10.9 million barrels per day, accounting for 11%, accounting for 12% and 21% of the world's total oil and gas exports. Europe is more dependent on Russia's oil and gas supply. Russia's exports of European oil and gas trade accounted for 29% and 33% of global exports to Europe in 2021, and Russia's pipeline gas to Europe accounted for about 35% of Europe's total natural gas imports.

therefore,If this geopolitical conflict leads to follow-up sanctions, it may lead to "joint and several losses" in the supply gap of some capital products, and the impact of the latter may be far greater than the impact caused by short-term risk appetite alone. The main transmission paths are:

The supply premium pushes up the price of crude oil, which in turn affects inflation expectations and tightening paths.In the context of relatively low local inventories and improved epidemic conditions, the "supply premium" that may be triggered by the situation in Russia and Ukraine has become a key variable in the trend of oil prices in the short term. According to IEA, Russia accounted for 11% (10.9 million b / d) of the world's production of about 98 million b / d by the end of 2021. According to the CICC Commodities Group, if the geo-risk turns into an actual supply shock and assumes that Russian oil supply is reduced by more than 2 million b / d, it could shift the oil market from equilibrium to shortage. as a result, oil prices may have a supply premium of $30 per barrel, which is as high as $120 per barrel ("oil: both sides of the" standing coin ").

In the context of the current high inflation, this will undoubtedly further push up apparent inflation and increase tightening pressure on the central bank.From a historical point of view, oil prices have a high correlation with overall inflation, especially the energy prices in CPI are highly synchronized (the correlation coefficient has reached 93% since 1990). The weight of energy prices in US CPI is about 7.4%. If oil prices rise while other prices remain unchanged, we estimate or increase the month-on-month ratio of US CPI by an additional 0.1 percentage points, which will undoubtedly increase market concerns about Fed tightening. At the same time, because oil prices are also highly correlated with inflation expectations (breakeven) in bond interest rates, but there is a long edge of 2.7-2.8 per cent, it may also bring upward pressure on long-end US bond interest rates at the current level (~ 2.4 per cent).

Nord Stream 2 may further aggravate the shortage of European energy market.The Beixi natural gas pipeline is an offshore natural gas pipeline operated by Nord Stream AG. The project consists of two parallel pipelines, No.1 and No.2. Beixi No. 1 pipeline was laid in May 2011 and put into use in November of the same year. Beixi No. 2 was completed in September 2021, but it has not yet been put into use and is still awaiting approval from relevant German and European authorities. In the fourth quarter of 2021, the cold weather superimposed geopolitical risks between Russia, Europe and the United States caused great disturbance to the European natural gas market. After the suspension of the examination and approval of the Beixi No. 2 pipeline, on December 18, 2021, the gas flow of the Yamal-Europe pipeline, one of the three major natural gas pipelines from Russia to Europe, plummeted from 250-300 GWh / day to 29 GWh / day, and changed the direction of gas transmission from the 21st. Supply risk premiums caused by supply emergencies pushed TTF natural gas prices to an all-time high of $59.5 per million British heat, before prices fell significantly after Russia issued a stable gas supply signal.

At present, the United States has decided to sanction the company behind Nord Stream 2, while Germany has also announced the indefinite suspension of the Nord Creek 2 project.[8]. CICC Commodities Group said that given that Europe is still in the heating season and natural gas stocks are low,Tight fundamentals may further magnify the impact of Russian natural gas supply, so if the geo-risk rises, it will also aggravate the shortage pattern in the European energy market (a brief comment on the potential impact of the situation in Russia and Ukraine on commodity markets)。

The escalation of the situation in Russia and Ukraine may raise concerns about global food security.Ukraine is known as the "European granary". Statistics show that 28% of the corn, 21% of the wheat and 18% of the barley imported into Europe come from Russia and Ukraine. At present, wheat, rapeseed oil and corn are directly affected by this in the commodity market, and some domestic imports of non-transferable soybeans and corn are also affected, so there is also a performance in price. The next five months are the main export period for Ukrainian corn, and if exports are blocked, it may directly benefit the price of corn in the United States. In addition, more than 40% of Ukraine's corn and wheat are shipped to the Middle East or Africa each year, and these countries are heavily dependent on imports, which could raise concerns about global food security if Ukraine's grain exports are disrupted. As a result, the CICC commodities group said short-term events could have a more direct impact on wheat and corn, given the export window.

Chart 9: since the second quarter of 2020, carbon prices have continued to rise, and the current futures settlement price of EU emission quotas has reached 95 euros per ton of carbon dioxide equivalent.

Figure 10: in the fourth quarter of 2020, the suspension of Beixi No. 2 was approved and the geopolitical upgrading of Russia and Ukraine once led to a rapid rise in European natural gas prices.

Figure 11: the share of major commodity exports of Russia and Ukraine in the global and European markets

Chart 12: demand for Russian crude oil imports from major European countries in 2021

Figure 13: sources of European natural gas imports

Chart 14: oil prices are highly synchronized with CPI energy prices in the United States, with a correlation coefficient of 93% since 1990.

Figure 15: if oil prices reach $120 / barrel at the end of the year and other prices remain the same, then CPI growth may rise by an additional 0.1% month-on-month.

III. Monetary Policy: the Game between risk aversion and inflationary pressure

For the monetary policy of the central banks of the major developed countries, mainly the Federal ReserveRisk aversion from short-term turmoil in financial markets and further inflationary pressures from a potential rise in commodities in the medium term are two opposing forces.Short-term risk aversion in the market may lower expectations of interest rate increases from trading expectations, such as the recent situation in CME interest rate futures. But on the other hand, under the background that inflation is still the main constraint, the market is worried that high oil prices will increase the intensity and timing of the Fed's forced tightening in the future.

We tend to think that given the current situation, unless it is further systematically out of control, it is difficult to significantly reduce the probability of raising interest rates at the near end.The limited decline of CME interest rate futures in March also illustrates this point, mainly considering that: 1) the evolution of the current situation is still quite uncertain, whether it is a big risk aversion or a sharp rise in oil prices, and the US financial market is not completely out of control, such as the critical credit spreads for corporate financing and the stock market; 2) it is now less than three weeks before the Fed's March FOMC meeting (March 15-16). 3) High short-term inflation remains the main constraint of the Fed's monetary policy. So it may still be a high probability to start raising interest rates in March and give a path to the contraction table, except that market expectations for a rate hike 50bp have fallen sharply ("if the Federal Reserve raises interest rates 50bp February 7-13, 2022").

In turn, a potential risk is that if subsequent commodity prices continue to rise, causing inflation to fall back more slowly and later than expected, or even an upward risk, it will push up expectations of interest rate hikes at the distance. it will also increase concerns that growth will fall faster in the future.This will not only increase the risk of "stagflation", but also make it more difficult for the Fed to operate monetary policy. The shadow of its transmission impact can be seen from the accelerated interest rate hike in the interest rate hike cycle from 1994 to 1995, the oil crisis in the 1970s, and the trend of interest rates after several recent geopolitical conflicts led to the rise of oil prices.

There is no doubt that the market pricing for this point is insufficient.At present, no matter from the 2s10s spread, the 2-year-3-year OIS spread, or the market mainstream expectations for the frequency and duration of interest rate increases, all show that the market currently expects this round of interest rate hikes will not be very large, the duration will not be very long. Therefore, in the event of an accident, greater compensation may be required.

Chart 16: since November 2021, the probability of FOMC raising interest rates in March has risen rapidly, reaching 100% recently.

Chart 17: with the release of the minutes of the FOMC meeting in January and the heating up of geo-conflicts, the probability of raising interest rates 50bp at the FOMC meeting in March fell back to 19%.

Chart 18: current CME interest rate futures implied 1.3times of interest rate increases in March, 3.5times in May and 6.2times in December

Chart 19: current mainstream institutions predict the number of annual Fed interest rate increases in 2022

Figure 20: us high-yield debt and investment-grade credit spreads have risen slightly recently, but are still relatively low

Figure 21: OIS spreads continue to narrow and hang upside down in the last 2 years

Chart 22: inflation and monetary policy changes in Europe and the United States after the outbreak of typical local wars in the past 20 years

IV. Sanctions themselves: Russian exposure to foreign debt and exchange rate, and enterprises with exposure

It is relatively certain that major developed countries have targeted Russia's financial system (such as sovereign debt financing and trading) and do not rule out further expansion. At the same time, the hindered export of some resource goods to reduce their current account income will also increase fiscal, external debt service and exchange rate pressure. Since the epidemic, in terms of growth, the Russian manufacturing PMI has continued to repair after the epidemic and has now returned to the range of expansion, but the PMI of the service industry is still lower than the pre-epidemic level; on the export side, the proportion of Russia's major export commodities has risen sharply recently, driving the export amount to continue to rise, far higher than the pre-epidemic level.

As of the third quarter of 2021, foreign currency-denominated liabilities in all Russian sectors accounted for 25 per cent of GDP (19 per cent in the non-financial sector), while foreign investors' holdings of Russian government bonds (OFZ) continued to decline since 2020, but still reached 20 per cent. As mentioned in the first part, at present, Europe, the United States and Japan have announced economic and trade sanctions against Russia. If the follow-up sanctions continue to deepen, it may lead to a narrowing of Russia's current account surplus, which in turn affects exchange rate movements and Russia's external financing capacity, and even leads to solvency risks. Recently, with the continuous escalation of the situation in Russia and Ukraine, Russia's exchange rate and sovereign debt CDS have fluctuated significantly, which also reflects this. The Russian rouble has depreciated 4.6% against the dollar, while Russian sovereign debt CDS has quickly climbed to 750bp and reached an all-time high.

In addition, it is also interesting to see whether some companies with business exposure to Russia will be affected by this, or whether sanctions will affect them.

Figure 23: Russian manufacturing PMI has been repaired continuously since the epidemic and has now returned to the range of expansion, but the service PMI is still lower than the pre-epidemic level.

Chart 24: Russia's recent sharp rise in the proportion of major exports has led to a sustained rise in exports, which is much higher than the pre-epidemic level.

Chart 25: foreign currency denominated liabilities of Russian departments as a whole account for about 25% of GDP, of which the non-financial enterprise sector accounts for about 19%

Chart 26: the share of Russian government bonds held by foreign investors has fallen rapidly since 2020, falling to 20% by the end of 2021

Chart 27: year-to-date, the Russian rouble has depreciated 4.6% against the dollar due to geopolitical escalation.

Chart 28: interest rates on Russian 10-year government bonds and 5-year credit default swaps have risen rapidly since the fourth quarter of 2021 and are now climbing to 750bp

The future may evolve: risk aversion is dominant in the short term and chain reaction in the medium term.

Based on the above analysis, it is not difficult to see that the trend of the short-term situation in Russia and Ukraine is still the most important variable, but it is precisely at this point that the market is the most difficult to grasp and accurately predict.

From an expected point of view, current asset prices have taken into account the situation that has occurred through severe volatility, so whether there will be any further impact in the future depends on two aspects:1) whether the situation will further escalate in the short term.The further escalation of the situation is reflected in the outbreak of further all-out war, or even the conflict between NATO and Russia; whether the sanctions against Russia are further escalated and expanded2) the influence degree of linkage and joint and several losses in the medium term.For example, global prices and monetary policy are constrained by the prices of oil, gas and agricultural products.

For markets where fundamentals are not directly affected by it, such as the Chinese marketIn the short term, simply because the indiscriminate sell-off in risk aversion releases pressure in other areas (such as concerns about growth and policy prospects), once the situation eases, it provides a better opportunity for re-intervention.Especially in the Hong Kong stock market, where valuations are already low. Comparatively speaking, China's own policy strength is the key to determine Chinese assets ("re-discussion on the meaning and enlightenment of the reverse of Sino-US policy cycle").

For US stocks, the Fed's follow-up policy path remains a major variable facing the current market, and now superimposed geopolitical risks, resulting in greater volatility, but vice versa. This is also tantamount to releasing some of the pressure on austerity concerns in advance. And from the technical point of view of U. S. stocks, such as the degree of oversold has also reached a relatively obvious position.In the short term, after the US stock market breaks through its key support level (around S & P 3300 and Nasdaq 13300), it is key to hold it steady without triggering more risks because of the decline itself, but in the medium term, robust earnings are still the main support of the market.

Chart 29: the S & P 500 index is overbought and oversold this week and is now close to oversold.

Chart 30: current market consensus expects the S & P 500 EPS to grow by 50.1% in 2021 and 8.4% in 2022

Chart 31: compared with the average value in 2005, PPPeck E such as gem and S & P 500 are all higher than the average; the valuations of Russia, Brazil and Hang Seng SOEs are still discounted.

Chart 32: in the medium term, earnings are still the most important support for the US stock market.