Russia-Ukraine Conflict Pressures Equity Market

By Jack Kraft, CFA, Advisor Directed Portfolio Analyst

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Last week, the U.S. equity markets finished lower as investor sentiment was dampened by geopolitical uncertainty in Eastern Europe. Choppy trading ensued for the week with the path of least resistance remaining toward the downside for stocks. The S&P 500 declined 1.6%, while the Dow slipped 1.9%. Meanwhile, the Tech-heavy Nasdaq Composite lost 1.8%.

Market participants closely watched headlines on the Russia-Ukraine crisis unfold causing safe-haven assets to catch a bid last week. Russia showed no signs of standing down as troops continued to build at the border of the two countries. Although there was brief hope of the situation de-escalating on false reports of Russian troops withdrawing, the situation continued to deteriorate into the end of the week with the U.S. evacuating diplomatic  personnel and Ukrainian forces exchanging fire with Russian-backed separatists forces. In commodities, COMEX gold rallied more than 2% on the week with the yellow metal eclipsing the $1,900/oz. mark for the first time since June.

With mounting uncertainty overseas Confluence’s bi-weekly geopolitical report outlines the possible market ramifications of a Russian invasion.  According to Confluence, they believe an invasion will be bullish for certain commodities, including WTI crude oil, natural gas, wheat, the U.S. dollar, and Treasuries. A result from the invasion could be economic sanctions from the U.S. and Western Europe on Russia, however, Europe will have a tough time finding other energy suppliers, particularly for natural gas. Getting non-Russian gas to the EU is extremely complicated and Qatar (the world’s next largest natural gas exporter behind Russia and the U.S.) has already shot down the possibility of shipments due to long-term contracts with Asian countries  and are already operating at max output. Food supplies will be affected as well with more than a quarter of the world’s wheat exports being disrupted by the two nations going to war. Russia and Ukraine currently supply 18% and 8%, respectively of global wheat exports.

Inflation continues to be sticky with the January reading on the Producer Price Index (PPI) jumping 1% month over month, doubling expectations of a 0.5% increase. On a year-over-year basis the index surged 9.7%. Also garnering attention was a report on January retail sales, which increased 3.8% fueled by active consumers and rising inflation.

Also in focus was the Federal Reserve as investors sifted through the release of the January FOMC meeting minutes. The minutes offered little to no new information on a faster pace of rate hikes. In fact, analysts seemed to perceive the minutes as more dovish given the measured tone of policymakers. Market expectation for a 50-basis point rate hike during the March Federal Reserve meeting slipped below 50%. According to CME Group, investors are now pricing in a 16.3% chance of a 50-basis point move, down from 60.8% one week ago.

This coming week will remain busy despite the shortened trading week with a slew of economic data reports and corporate earnings report from some of the largest U.S. retailers. Headlining the economic calendar will be IHS Markit, which will release February preliminary manufacturing and services PMI updates Tuesday. In addition, a reading from the Consumer Confidence index will be in focus Tuesday. In Real Estate, homeowners will get an updated reading on the FHFA home price index and a reading on new home sales for January. Inflation will continue to be closely monitored with readings on the PCE price index expected to hit the tape Friday. The Federal Reserve uses the PCE price index as its main proxy to measure inflation.

Date Report Period Consensus Previous
TUESDAY, FEB. 22
S&P Case-Shiller home price index (YoY) Dec. 18.80%
9:00 AM FHFA home price index (YoY) Dec. 17.60%
9:45 AM Markit manufacturing PMI (flash) Feb. 56 55.5
9:45 AM Markit services PMI (flash) Feb. 52.2 51.2
10:00 AM Consumer confidence index Feb. 109.5 113.8
WEDNESDAY, FEB. 23
None scheduled
THURSDAY, FEB. 24
8:30 AM Initial jobless claims Feb. 19 234,000 248,000
8:30 AM Continuing jobless claims Feb. 12 1.59 million
8:30 AM Gross domestic product revision (SAAR) Q4 6.90% 6.90%
8:30 AM Gross domestic income (SAAR) Q4 5.80%
10:00 AM New home sales Jan. 806,000 811,000
FRIDAY, FEB. 25
8:30 AM Nominal personal income Jan. -0.30% 0.30%
8:30 AM Nominal consumer spending Jan. 1.50% -0.60%
8:30 AM PCE inflation (monthly) Jan. 0.40%
8:30 AM Core inflation (monthly) Jan. 0.50% 0.50%
8:30 AM PCE inflation (year-over-year) Jan. 5.80%
8:30 AM Real disposable income Jan. -0.20%
8:30 AM Real consumer spending Jan. -1.00%
10:00 AM UMich consumer sentiment (final) Feb. 61.6 61.7
10:00 AM 5-year inflation expectations (final) Feb. 3.10%
10:00 AM Pending home sales Jan. 0.80% -3.10%

 

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