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In geopolitics, it seems that the selective escalation scenario is playing out in the conflict around Ukraine. This means market jitters, energy spikes, and a lot of patience needed on the part of investors before panic eventually ebbs. In this case, energy prices should drop as well and risk assets recover accordingly. Unfortunately, it still means that a full-blown escalation cannot be ruled out yet, even if unintended by both sides. We can, therefore, expect another few days in which sabre-rattling hijacks headlines and keeps investors on the edge of their seats.

As if that were not enough, the central banks are keeping investors guessing about what the trajectory of the interest rate normalisation will look like. While the European Central Bank and the Bank of Japan have started to back-paddle, the jury is still out for the Federal Reserve. After another bumper inflation print last week, the heat is on. This week, the latest meeting minutes of the Federal Open Market Committee will be out. We accentuate our preference for a front-loaded approach by upgrading our rate expectations to 50bps for the March meeting. The race to ever-higher rate tightening forecasts, on the other hand, should soon die down.

Conclusion for investors

For investors, the situation is agony. While the thought of a full-blown escalation in Ukraine may be devastating, past crises in geopolitics have shown that it does not pay off to run for the hills. Instead, investors should watch out for signs of improvement and earmark the potential bargains worth hunting. ‘Buy when there is blood in the streets’ is an admittedly martial saying on financial markets. European banks lure with bumper payouts in the making. It is reminiscent of the US banks a decade ago, when they turned into capital-return machines.

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