Bond markets signal recession warning, contrasting fortunes for miners Polymetal and Petropavlovsk, and Team17 quantifies hit from Russia/Ukraine war

“Recession is the word of the day after an important warning sign was triggered on the markets,” says Russ Mould, Investment Director at AJ Bell.

“Last night the yield on two-year US government bonds rose above that of the 10-year note, causing an inverted yield curve – something that has historically preceded a recession.

“Traditionally investors demand a higher return and therefore a higher yield on longer dated bonds than shorter dated ones as compensation for the greater risks from inflation and issuer default.

“Therefore, to see higher yields on shorter dated bonds versus longer-dated ones is less common and hence why investors sit up and take notice when it happens. Yesterday’s event was the first time it has occurred with US Treasuries since 2019.

“Investors shouldn’t be surprised at the recession warning given the soaring cost of living and how inflationary pressures threaten to dampen economic activity.

“Central banks have already started the typical course of action when you have high inflation, namely putting up interest rates. They will need to walk a careful path, not being too aggressive with the pace and scale of rate rises so that it chokes off the economy. The US Federal Reserve is being watched the closest as there appears to be a growing risk that it does too much too fast.

“Despite a healthy jobs market and resilient consumer spending of late, stock markets have already been pricing in an economic hit later this year. For example, just look at the sharp decline year to date in UK consumer-facing stocks such as retailers and restaurant operators. It doesn’t much to realise that more expensive energy, food and fuel bills will eventually cause consumers to think twice before spending money.

“While US markets last night enjoyed another strong session, with the Nasdaq up 1.8% and the S&P 500 up 1.2%, European equities didn’t fare as well on Wednesday after the recession signal on the bond market.

“The Dax traded 0.8% lower, the CAC 40 fell 0.6% and the Ibex 35 slipped 0.5%. The outlier was the FTSE 100 which pushed ahead by 0.2% thanks to strength in miners and oil producers.

“The fallout from the Ukraine war continues to affect companies in the Western world. The latest businesses to quantify the impact include computer games maker Team17.

“Uncertainties around the release date of two games developed with partners in Ukraine and the decision to close platform sales to Russia and Belarus means Team17 says it will incur a £4 million hit to sales and £2.5 million hit to earnings in its current financial year.”

Polymetal / Petropavlovsk

“Two Russian gold miners, two contrasting fortunes. While both Polymetal and Petropavlovsk have been kicked out of the FTSE indices, it is only the latter for now which appears to be facing an existential crisis.

“Polymetal is more diversified, with assets in Kazakhstan as well as Russia, but it also appears to be able to sell gold and silver from Russia to markets in Asia as well as benefiting from domestic demand.

“Debt is moving higher, but the company has a decent amount of dollar-denominated liquidity in non-sanctioned banks.

“With its operations continuing to chug along, new board appointments in place and sanctions not having a material impact on the business for now, Polymetal is setting itself up to survive and it will hope thrive assuming the conflict in Ukraine can be brought to an end.

“All except the most advanced development projects are on hold and a lot of attention will now be on a capital markets day at the end of April when the company will give shareholders a more detailed update.

“This event is likely to see significant attention on a mooted plan to spin off its Kazakh assets – something some of its major investors are pushing for.

“What Petropavlovsk wouldn’t give for the breathing space of a few weeks to get its affairs in order. The firm is in the invidious position of being unable to pay its debts or sell any gold thanks to one of its main counterparties – Gazprombank – having its assets frozen and the miner is clearly struggling to find other parties to buy the gold.

“A gold producer which can’t sell gold doesn’t look a very sustainable proposition and while Russian billionaire Sergey Sudarikov’s recent decision to buy 29% of the group is a show of faith of sorts, having him as such a dominant shareholder probably doesn’t help the company too much in the short term.”

These articles are for information purposes only and are not a personal recommendation or advice.