After Morgan Stanley Chief Investment Officer Mike Wilson stated that the Russian invasion of Ukraine “materially increases the odds of a polar vortex for the economy and earnings,” Bloomberg TV turned to Axonic Capital Director of Research Peter Cecchini for his insights on the economic effects of the conflict.
Specifically, concerning whether these geopolitical tensions will impact U.S. Federal Reserve policy, Cecchini recommends taking a step back and re-analyzing one of the central economic components of the conflict: energy prices. “With all the discussion around it, at the end of the day, that is the most important thing to keep in mind,” he says.
There are currently several ways to get natural gas into Europe: The Baltic Sea, Black Sea, and, most importantly, Ukraine. “It’s somewhat of a pincer move by Vladimir Putin, and if this conflict continues, energy prices will continue to rise,” Cecchini explains. If this continues, he believes it will put the Fed in a difficult position because energy prices are a significant factor in inflation. “Even though [the Fed] says it only cares about core inflation, at a certain point, it has to care about the impact of energy on prices more broadly,” he adds.
Amidst growing geopolitical tensions, investors are also faced with intense volatility in the equity markets. Bloomberg TV again turned to Cecchini for insights into whether investors should turn to cash amidst this turmoil and uncertainty.
“A cash position right now is critical. I think this is a year for active managers,” he explains. “We managed to keep the duration of our portfolio very short, and we continue to prefer well-researched, cash flow-positive, well-collateralized assets.”