There are three main issues eating away at financial markets at the moment. The first is war—markets are worried about the financial market and geopolitical implications of the war in Ukraine, which this week almost included a default on two dollar debt repayments by Russia. The second is commodity price volatility—markets are concerned that the massive volatility in commodity markets will break something, leading to major financial market instability. And the third is that the Fed and/or high oil prices could induce a recession—markets fear that we are heading straight for a recession, given that both spikes in oil prices and Fed tightening cycles have historically been catalysts for recessions. Moreover, the combination of the latter two factors would make for a doubly-toxic dose of pain, from which a recession will be the only outcome. These fears are also taking place against the backdrop of a pandemic, which has clearly not disappeared, based on recent press reports.

In this Economics Weekly, we discuss these topics with the view that volatility is likely to remain elevated. We also look at which indicators investors should track as the most sensitive to these market developments.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.