What's takeaway 1 on Global Q2?

2022 is expected to be defined by geopolitical tensions and economic policy shifts.

What's takeaway 2 on Global Q2?

Rising volatility, interest rates, and prices are anticipated to impact currency valuations.

What are the market implications for Global Q2?

Traders should closely monitor the EUR/USD pair, particularly as it approaches the consensus target of 1.075. Additionally, any shifts in central bank policies or geopolitical developments could serve as catalysts for significant market movements.

Global Q2-22 outlook – recovery, disrupted

The desk interprets the evolving geopolitical landscape and its implications for FX markets, emphasizing that 2022 is shaping up to be defined by a new world order influenced by the Ukraine-Russia conflict and China's ongoing zero-COVID policies. Per the full note from Standard Chartered, this environment is characterized by rising volatility, interest rates, and prices, which are likely to impact currency valuations significantly. With the consensus target for EUR/USD at 1.075, traders should be vigilant about how these macroeconomic shifts play out in the coming months.

What the desk is arguing

The desk posits that the current geopolitical tensions and economic policies are setting the stage for a significant shift in FX dynamics. Per the full note from Standard Chartered, the interplay between the Russia-Ukraine conflict and China's stringent COVID measures is expected to drive volatility and influence interest rates globally.

Supporting this view, the desk highlights that rising prices and interest rates are already being felt across markets, creating a complex backdrop for currency trading. The expectation is that these factors will lead to a more pronounced divergence in monetary policy among central banks, further impacting currency valuations.

Where it sits in our coverage

Our consensus target for EUR/USD is 1.075, with a range between 1.04 and 1.12. Notable targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view aligns closely with jpmorgan, which shares a similar outlook, while bofa presents a more cautious stance, suggesting potential downside risks to the euro. The desk's call is positioned at the upper bound of the consensus range, indicating a more bullish outlook on the euro against the dollar.

How other firms see it

Several firms, including jpmorgan and citi, are aligned with the desk's perspective, anticipating that geopolitical tensions will continue to fuel volatility and influence central bank policies. Conversely, bofa and deutsche bank express a more cautious view, suggesting that the current environment may lead to a stronger dollar in the near term.

Key currency pairs to watch include EUR/USD and USD/JPY, as both are likely to reflect the broader shifts in monetary policy and geopolitical developments. The trajectory of these pairs will be closely tied to central bank decisions and economic indicators in the coming months.

Hello, and welcome to this special podcast from Standard Chartered. I'm Aneesha Tank. Every year at this time, the research team releases its second quarter economic outlook for the year.

And if 2021's expectations were influenced by a new world attitude due to the pandemic, then this year 2022 may end up being about a new world order. No surprises that the publication inspiring this podcast is entitled Recovery Disrupted. So there's no way that we can address the outlook without mentioning the invasion of Ukraine, ensuing sanctions on Russia and the longevity of China's zero COVID plans.

Volatility, interest rates and prices are all on the up. Sentiment is down and polarization looms. So what does all of this mean for the markets?

Drilling down the big forecast and explaining the issues, I have with me Eric Robertson, Global Head of Research, Chief Strategist. We have with us also Sarah Hewitt, Head of Research for Europe and the Americas. Sarah, we're almost halfway through the year.

How's it looking at the moment? And I have to say that reading the headlines, consumer confidence numbers would suggest it's all sadly a little bit gloomy. Unfortunately, that is the case. 2022 was supposed to be the year when the world finally emerged from the pandemic disruption.

Normalization was the watchword. The idea was that inflation pressures would ease, employment would recover, governments would be able to restore their finances, central banks would gradually start to remove their emergency measures. Instead, what we've seen is the Russia-Ukraine war has worsened inflationary pressures and really damaged confidence, particularly in Europe.

We've seen a resurgence of COVID cases in China. Governments are having to spend more to limit the impact of higher energy prices and central banks are sounding a lot more hawkish. We've actually downgraded a lot of our growth forecast.

We've shaved one percentage point of our global growth outlook for this year since Russia invaded Ukraine and we recently lowered our expectations for Chinese growth given the latest soft data, albeit we still expect that growth will reach 5% this year in China. This time last year, we were all talking about normalization and now look at where we are. The word of the day now is stagflation, isn't it, Eric?

We're talking rates up, growth slowing, prices increasing. The question is, how much of a threat is this? What feels like a triple whammy for markets and consumers?

What can we expect down the line from central banks? Late last year, our view was that 2022 would be a year of two halves. We would spend the first half of the year worrying about upside risk to inflation.

That would transition into the second half of the year when we would start to worry about downside risk to growth for a number of reasons, including central bank rate hikes. But what we're struggling with at the moment, not just us in the markets, but also the central banks, is the fact that we're getting upside inflation risk and downside growth risks. It hasn't been that smooth transition from one world to the other that we were hoping would happen.

Stagflation is a horrible economic condition for central banks to wrestle with because, on the one hand, they probably need to be much more aggressive in the short term in terms of raising interest rates and tightening monetary conditions. On the other hand, that commitment to battling inflation is obviously going to have a major negative impact on growth. Central banks have to accept that they may be sacrificing some growth momentum to get inflation under control, and that's going to create uncertainty across all of the financial markets that we pay attention to.

Monetary policy isn't the only tool that you have to respond to economic change. There is fiscal policy as well. What can we expect?

This is a really interesting point because it highlights some of the different policy approaches that some countries may pursue or that some countries would like to pursue but perhaps are not able to. The first example would be China. We do expect a fair amount of policy support from China to stabilize growth, but we expect that to be on the fiscal side in terms of infrastructure spending, commitments to decarbonization, commitments to improving their urbanization ratios.

That should be a net positive over the course of the year. For a number of other economies, though, having spent two years and quite a bit of fiscal capital already to get their economies through the COVID crisis, many economies are faced with a lack of fiscal space. They just don't have the financial resources that they would like to have to support growth at this point in time.

Sarah, let's talk about the yield curve. U.S. Treasuries are in a great deal of focus as well.

One needs to ask how that's shaping up. Early in April, the yield on the two-year U.S. Treasury note briefly rose above the 10-year yield, which in the past has been associated with a high probability of recession.

That certainly raised some concerns. More recently, we've seen a re-steepening, which suggests that the market is fretting that the Fed may not have inflation under control, very much returning to this theme of the stagflation risk. If we look at the U.S., the good news story has been employment, similar across Europe as well.

But we think that the balance is likely to swing back towards worries over U.S. growth. To be clear, we're not forecasting a U.S. recession, but we are likely to have some very weak quarters. We've seen U.S. real disposable incomes declining every month since last August.

Savings, which were built up during the pandemic, are being depleted. Sentiment is down at levels last seen in 2011. That was associated with a time when consumer spending stalled.

On the housing front, home buying has been pretty strong during the pandemic, but we're now starting to see home buying falling. Affordability is weaker and mortgage rates are rising. Fed tightening is already feeding through into tighter loan conditions.

We're also likely to see inventories being drawn down after a sustained buildup last year. All in all, we're going to see subdued growth in the U.S., certainly below trend if we look at where we'll be by the end of this year. There are recession risks.

We think they can be avoided, though. One of the positive things you did mention right at the beginning was employment. Is that relative to how badly employment was knocked during the pandemic?

There was a huge and very swift uptick in unemployment during the pandemic. That was something that we saw globally wherever economies went into lockdown. The surprise with this crisis has been that the unemployment rate has fallen very swiftly.

If we make a comparison with the global financial crisis, it took a number of quarters to get back to the pre-crisis unemployment rate. This time around, we're nearly there. It's been a very swift recovery in employment, which is clearly good news.

Having said that, there is still scope for further jobs gains. Our concern is that if we are seeing a squeezed demand destruction, essentially, as a result of high inflation, then ultimately that feeds through to slower jobs growth. One of the other areas where actually we're seeing a bit of positivity, and Eric, let me put this one to you, is commodity markets, whether it's coffee, paper, oil, energy.

It's a very different story, isn't it? When we turned constructive on the commodity markets in the second half of 2020, there was very much a pro-growth, pro-recovery angle to that story. We were looking for a significant increase in infrastructure spending and investment around the world.

We thought that the recovery in global demand would lift commodities across all of the commodity asset classes. More recently, the military conflict in the Ukraine has contributed to significant supply chain disruptions. The markets for wheat, soybean, corn, fertilizer, all significantly disrupted in many ways.

The commodity recovery has gone from being something that was very much viewed with a positive lens to something that's starting to be associated with demand destruction. You take a country like Egypt, where they get 80% of their wheat from Russia and the Ukraine. That now is no longer available to them, or if it will be, at significantly elevated prices.

What we're starting to worry about is that basic goods are now becoming prohibitively expensive for a number of economies around the world. That's a real worrying sign for economic growth in the second half. If you pivot to a different supplier, how fast can that happen, and does that actually mean it's a win for some countries?

There will certainly be winners from this change in supply route. Take Europe, which has been so dependent on Russia for energy supplies. Alternative supplies of gas, of oil are certainly available, but they may take significantly longer to arrive on Europe's shores.

There are other sources of wheat around the world, Australia, for example, but the distance, the time to bring those critical supplies to market is significantly extended. That means increased transport costs, increased freight costs. Therefore, the end price to the end user is going to be elevated.

There will be new winners, but also new losers. Earlier, you spoke about the outlook for China and the growth expectations. In terms of policy response, what are your thoughts?

China had the distinct advantage over the last one and a half years of being one of the first economies to recover from the COVID crisis, and it was looking like China was going to spend most of 2022 in a normalization phase. Growth would be less robust than it had been at the peak last year, but still comfortably above 5%. Their regulatory and policy tightening last year, the hit to commercial real estate have combined this year with renewed COVID lockdowns, and we have seen entire cities shut in, and that's had a major impact on consumer spending and on the services side of the economy more broadly.

The stimulus that is being put in place is more on the fiscal side, on the infrastructure and investment side, because these are areas where that stimulus can be directed into the economy very quickly. The good news is that if this COVID crisis in China is brought under control, there's still eight months left in the year for them to get growth back into a reasonable range of somewhere between 5% and 5.5%, but the longer COVID presents a challenge to China from a manufacturing point of view and an export point of view, then there are still some downside risks. I want to pick up with Sarah because we keep seeing headlines referring to lockdown nightmares in places like Shanghai, and I wonder whether that's indicative of a looming problem.

On the flip side, is there actually an opportunity in terms of the markets? COVID outbreaks and stringent lockdowns are having a significant impact on growth. We're likely to see that in the second quarter data, particularly in the services sector.

We've seen activity in labour intensive industries, contact intensive services, real estate sectors, particularly weak transportation, catering, accommodation have been hit hard and retail sales started to slide in March and fell further in April. Our own surveys of small and medium-sized enterprises actually fell below 50% for the first time in two years in April. Having said that, manufacturing appears to be less vulnerable than services and capital intensive industries have been stable.

Similarly, export-oriented businesses seem to be holding up well. Though, if we are on the hope that the global economy doesn't slow too much, then there's still some pretty strong potential there for Chinese exporters. The economy is likely to stall in the second quarter, but we think that second half of the year is going to see a rebound in growth on easing of lockdown measures.

And of course, we're expecting a stimulus to policy to really have an impact. It's a politically important year for China with the Party Congress, a significant event in the second half. Certainly, in terms of FX markets, then that ought to be supportive.

We would see further opportunities in China later this year. So near term, there are some risks around the outlook, but we're confident that come the second half of the year, the economy is going to be performing at full pace. Is there a tipping point for China in terms of what that global growth number would need to be for there to be any concern, and also on COVID?

The response that we've seen so far has been restrictions on movement and activity, and that's having a knock-on effect on the economy. The key still remains what's happening to employment. Are we seeing employment growing in the very near term while restrictions are in place, then that's more of a struggle.

But I think that as long as growth is above the four to five percent pace, then employment growth can be supported. If it looks at risk of falling significantly and sustainably below that pace, then I think that that is a problem. We shouldn't forget that there are significant resources that Beijing can use to support economic activity, and there has been a very strong commitment that indeed they will use those resources.

We still feel confident that employment is going to be continuing to grow. Over the medium term, working age population is peaking out, demographic factors will kick in, so it's natural that the pace of growth will start to moderate in the coming years. But really that's more of a reflection of the fundamental situation of an increasingly wealthy economy.

Eric, to segue into that sort of fiscal firepower, China has the resources to be able to deal with this. When we look elsewhere, emerging markets in particular, it's very difficult. You don't really have that margin.

One of the themes that we've been exploring in detail is this idea of the haves and the have-nots. And when people think about that expression, they tend to think about wealth inequality amongst the broader population, but it's also extremely applicable to how we think about sovereign nations and economies. And this cuts across both developed and emerging markets.

There are a number of economies who may like to increase their fiscal stimulus, either to support growth or to help mitigate the risks from higher food and energy prices, but they simply may not have the fiscal space to do so. Or even if they do, it requires significant external borrowing. Capital markets may not be terribly welcoming to those economies with strained fiscal balance sheets.

So there are a number of conditions here where I think the fiscal response may be challenged. On the other hand, one of the themes that we're seeing this year is that those economies where the central banks started raising rates quite early in the cycle, even last year, are in many ways being rewarded. Their currencies are stronger on a relative basis.

Their equity markets are outperforming. Again, this theme of the haves and the have-nots plays across not only fiscal policy, but monetary policy as well. Those that moved early in terms of rates, are there any particular economies that illustrate this in a good way?

I think LATAM is a fantastic example. A number of economies in Latin America last year started raising rates and have continued to do so this year. By comparison with a number of the economies, the Fed, the ECB, and even some of the economies in Asia that have yet to start raising rates, LATAM is way ahead of the curve.

You see that reflected in currency performance. The top performing currencies this year are in Brazil, Colombia, Chile, and Mexico. However, if we look in Asia, we've seen a number of currencies like the Korean won and the Taiwan dollar underperforming.

There are some interesting narratives around who in EM has been outperforming this year and why. Sarah, with all of this in mind, how concerned should we be about this disparity? I know the research team likes to raise awareness about this message of the haves and the have-nots.

Last year, we touched on it within the context of vaccine deployment. Now, we're seeing it through a very different lens, aren't we? Yes, absolutely.

As Eric said, you have economies that are benefiting from higher commodity prices. The haves, as it were, the have-nots are disadvantaged not just by higher commodity prices, but the broader disruptions to trade and travel resulting from the pandemic. Food prices are potentially the most destabilizing risk and they have a history of feeding into political risks.

So, I think we also need to consider the have-nots from that perspective. It's not as clear-cut as you might imagine. So, for example, in Africa, you've got a country like Uganda, which is relatively resilient.

It's consuming domestically sourced staples. It's on the verge of becoming an oil producer. Similarly, Senegal, Tanzania, Mozambique are seeing plenty of interest in gas development.

South Africa is a producer of palladium, rhodium, platinum and can potentially replace sanctioned Russian exports. On the have-not side, Eric has already mentioned like Egypt, a major importer of wheat from Russia and Ukraine, but also the war has disrupted tourism flows from these countries. Thailand, Sri Lanka have seen their tourism industries damaged by the pandemic and by the latest crisis with a consequent hit to their economies.

We do have to recognize that there are very mixed fortunes. Even among energy producers, high prices are not unequivocally positive. You've got some OPEC-class producers in Sub-Saharan Africa, so they're benefiting from high prices, but there's actually little spare capacity to really benefit from the increased demand and the reduction of production from Russia.

So Nigeria and Angola, for example, who are already struggling to meet their production quotas, in part because of underinvestment over past years. I did want to ask you, Eric, about any possible Black Swan events. If you could think of any, what would they be?

We have a view that global growth will slow down into the second half of the year. Central banks are all tightening monetary policy fairly aggressively now to get inflation under control. The risk from an economic point of view and a financial market point of view is that we get to the end of the year.

We've seen a significant amount of monetary tightening. Global growth looks really soft and is at risk of plunging further, but inflation hasn't come down. We in the markets and the central banks all look at each other and say, we've just engineered a significant tightening of monetary policy around the world and inflation isn't improving.

Then the risk of actual stagflation as opposed to just the prospect of it is something that markets will really struggle with. That raises the issue of do central banks just continue to tighten monetary policy into the future? Maybe monetary policy is ineffective to deal with the kind of inflation we have today.

That's not our base case scenario, but as I look to the second half of the year, that's something that really keeps me on my toes. Thanks to the both of you. That's been really fascinating and great to get your insight and a bit of a drill down on these big issues.

Huge thanks to Eric Robertson, who's in Dubai and also Sarah Hewin in London. A big thank you, as always, to all of our listeners. It's always great that you can tune in.

I'm Aneesha Tank. Thank you and goodbye.