Fundamentals

Russia’s invasion of Ukraine has caused widespread disruption in commodity markets and is the primary culprit behind the rally in global food prices this year (see chart). Prior to the war, output from Russia and Ukraine represented nearly 30% of global wheat production. The United Nations estimates that at least 20% of Ukraine’s arable land is now no longer viable for agricultural use. In addition, disruption to shipping ports has caused the country’s wheat exports to fall by over 60% compared to a year ago. The outlook for wheat production is further complicated by rising prices for fertilizer, which plays a key role in boosting crop yields. Fertilizer production costs are rising in part due to higher natural gas prices, which have spiked on the back of Russian sanctions. In turn, the cost of planting seeds increases and could ultimately create further upside pressure on food prices. Rising food prices present a particular challenge to the emerging world where the sensitivity of domestic households to food inflation is most acute. Increasing concerns over food security have already prompted some governments into action; for example, India has banned wheat exports in an effort to secure domestic food supplies. Further government intervention is likely in vulnerable parts of the world, such as Asia and the Middle East, in order to prevent political unrest; however, additional fiscal spending could potentially add further inflationary pressure, particularly in emerging market economies.

Quantitative valuations

The possibility of higher food prices, combined with subsequent fiscal stimulus in the form of government food subsidies, has knock-on effects for central bankers around the world. In order to quell inflationary pressure many of the central banks (with the notable exception of China) have already sought to tighten monetary policy in 2022. Increased debt issuance by governments looking to appease their struggling populations could force central banks to tighten even further, pressuring bond yields higher. Currency valuations may also impact commodities markets and emerging markets. In recent weeks, the US dollar hit a 19-year high, compounding the pressure on emerging economies with higher costs for both foreign debt servicing and domestic businesses purchasing commodities from overseas.

Food prices have surged to the highest level in over a decade

Source: United Nations, J.P. Morgan Asset Management. Data as of 6 May 2022.

Technicals

While policymakers are still battling rising prices, investors have been given some respite over the week as traditional market relationships have begun to re-establish themselves. Historically, risk assets are negatively correlated with duration positioning. This relationship meant that in the event of a significant risk-off move in markets, a diversified portfolio would receive some protection from a rally in duration. However, throughout much of 2022, this dynamic has turned positive, resulting in a painful double blow to returns year to date. Fortunately, there are tentative signs that the negative relationship is returning, providing some diversification to portfolios and perhaps signalling that stability is beginning to return to fixed income markets. (Data as of 18 May 2022).

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.