Geopolitical uncertainty returns as a key driver, adding to volatility and hitting risky assets – Danske Bank

Economists at Danske Bank try to understand what has happened in Russia over the weekend, what could be the motives behind it, and discuss potential implications.

Central banks still need to stick to their inflation mandates

We think geopolitical uncertainty has again become an important market driver, and although an escalation has been avoided for now, market volatility is likely to increase going forward. 

Risky assets could suffer in the short term and rates markets could take a hit as well, even though we think central banks still need to stick to their inflation mandates. However, if spreads widen and equity markets correct lower enough to compensate for lower yields so that overall financial conditions tighten (as a result from rising geopolitical risk), there is no conflict for central banks.