Recent gains in global equity markets have prompted comparisons to the short-lived rebound that followed Russia's invasion of Ukraine in 2022, a rally that ultimately gave way to renewed declines. Deutsche Bank strategist Henry Allen, however, contends that likening the present situation to that period misses several important distinctions.
"The resilience we've seen across multiple asset classes makes more sense than it might first appear, and isn't just a sign of complacency," Allen wrote, before laying out four reasons that separate today’s energy shock from the one that rattled markets three years ago.
First, Allen notes plainly that oil and gas prices are lower now than they were in the earlier episode. This applies both to current front-end prices and to market expectations looking forward. To illustrate the gap, he points to a comparable point one month into the Ukraine conflict when Brent futures were pricing an extended shock - six-month contracts were above $100 per barrel. By contrast, six-month Brent contracts today sit below $80 per barrel.
Second, the analyst argues that the effect of any price spike on the real economy is reduced because of two interacting factors: cumulative inflation since 2022 and ongoing declines in energy intensity. The cumulative inflation figure he cites is roughly 10% since 2022. In that context, a given increase in energy prices represents a smaller incremental impact on nominal economic measures, and improvements in energy efficiency lower the direct energy burden.
Third, Allen emphasizes that inflation is starting from a lower base now, which lessens the impetus for central banks to tighten policy aggressively. That difference in the monetary policy starting point alters the transmission from an energy shock to financial conditions compared with 2022.
Fourth, macroeconomic indicators on both sides of the Atlantic remain expansionary, a contrast to prior oil shocks such as the 1973 crisis and the Gulf War in 1990 when economic deterioration was immediate. Deutsche Bank said the downturn in 2022 deepened because it coincided with a severe energy shock, elevated inflation and the most aggressive rate-hiking cycle in a generation - a confluence the bank judges absent in the present episode.
"Today, we are not meeting those severity thresholds," Allen wrote.
Deutsche Bank also highlighted a remarkable market data point: the S&P 500 has recorded three consecutive weeks of gains above 3%, an outcome the bank notes is only the third such occurrence since World War II. That pattern is presented as further evidence of the market’s current resilience.
The combination of lower energy price levels, reduced relative impact from price moves due to cumulative inflation and energy efficiency, a more benign starting point for inflation and expansionary macro data helps explain why equities have held up better than during the 2022 energy shock, according to Allen’s assessment.
Summary
Deutsche Bank strategist Henry Allen identifies four factors - lower oil and gas prices, a smaller effective impact of price moves given cumulative inflation and declining energy intensity, a lower inflation starting point limiting central bank pressure to tighten, and expansionary macro data on both sides of the Atlantic - that distinguish the current episode from the 2022 energy shock and help explain equity market resilience.