The Market Today

Investors Shed Risk as Fighting in Ukraine Intensifies


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

This Week’s Calendar: Russia’s invasion of Ukraine continued to drive markets on Monday as fighting intensified over the weekend and the West ratcheted up sanctions (more below). While delegations from both countries gathered early Monday (U.S. time) for talks near the border with Belarus, the fighting continued and skepticism around significant progress towards a possible ceasefire remained high. Although the rapidly developing geopolitical situation will remain the market’s major focus, there are a couple of key economic reports to watch for this week. Both ISM surveys will be released before the BLS publishes the results of February’s nonfarm payroll report on Friday. As of this morning, economists expect job growth of 400k, a 0.1% decline in the unemployment rate back to 3.9%, and a 0.5% monthly gain to nudge average hourly earnings up from 5.7% YoY to 5.8%.

Today’s Calendar: In this morning’s economic data, the advance release of January’s goods trade data showed an unexpectedly large widening of the deficit to start the first quarter. The goods trade deficit widened from -$100.5 billion (previously -$101.0 billion) to an eye-popping -$107.6 billion, a new record. Imports of goods into the U.S. rose 1.7% last month to $262.5 billion while exports declined 1.8% to $154.8 billion, consistent with the general trend throughout the pandemic showing a sharper and quicker recovery of U.S. economic activity relative to major trading partners. The surprisingly wide deficit will create headwinds for 1Q22 GDP estimates, already under mathematical pressure from expectations for a reversal of 4Q21’s large inventory-driven jump. The inventory reports released alongside the trade data were mixed. Wholesale inventories rose 0.8%, disappointing expectations for a 1.3% increase, while retail inventories jumped 1.9%, outpacing the 1.0% gain expected. At 9:30 a.m. CT, the Dallas Fed will release the results of its regional manufacturing survey for February and Atlanta Fed President Bostic will speak on the economy.


OTHER ECONOMIC NEWS

ICYMI – February 25, 2022 Weekly Market Recap: Markets were incredibly volatile last week as the recent escalation in tensions near the eastern border of Ukraine boiled over into a full-fledged military invasion by Russia. U.S. markets returned from Monday’s holiday to volatile global trading after President Putin formally recognized the independence of a couple of pro-Russia regions in the eastern Donbas region of Ukraine. Western countries responded to the “serious escalation” with a round of relatively benign sanctions on a notably calmer Tuesday. However, markets became extremely volatile again Wednesday after Ukraine fell victim to cyberattacks hours before President Putin announced he was authorizing a special military operation in Ukraine. As reports of rocket attacks across Ukraine rolled in, global markets careened into a tailspin. Russia’s MOEX equity index lost nearly half its value and the Ruble hit a record low against the Dollar. Stocks sank across Asia, Europe, and the U.S. and Treasury yields fell by double digits. The tone turned, however, shortly after U.S. trading began. After a steady recovery, the major U.S. equity indices staged their sharpest intraday reversal since March 2020 to post solid gains and Treasury yields unwound most of their earlier declines. Helping fuel the rebound, the U.S. announced a second tranche of sanctions that were less extensive than some had expected. Another positive performance on Friday, despite continued concerns about the situation in Ukraine, helped push Treasury yields and stocks higher for the week. Overshadowed by the geopolitical developments, the week’s economic data was generally better than expected. Capping off the data releases, consumer spending for January was surprisingly solid as PCE inflation firmed up as expected, pushing annual rates up to new highs since the early 1980s. Click here to view the full recap.


TRADING ACTVITY

Investors Shed Risk as Fighting in Ukraine Intensifies and the West Ratchets Up Sanctions on Russia: Monday’s global market open was, not surprisingly, an all-out flight to quality. Stocks sold off and Treasury yields tumbled as gold prices jumped and oil rallied. The fighting in Ukraine intensified over the weekend and the West ratcheted up the pressure on Russia after President Putin placed his nuclear deterrent forces on high alert and commercial satellite images spotted significant Russian reinforcements en route to Kyiv. In addition to many countries committing weapons and other military supplies, the U.S. joined the EU and other countries with announcements of new and tougher economic sanctions. Among those considered the most punitive, some Russian banks will be removed from the SWIFT financial system and steps were taken to block Russia’s central bank from accessing some reserves held abroad. The Russian Ruble crumbled as much as 30% and remained down 20% before U.S. trading opened, forcing Russia’s hobbled central bank to hike its target rate from 9.5% to 20.0% in an attempt to stabilize its financial system. While early market trends remained intact heading into the U.S. session, the size of most moves had moderated. Europe’s Stoxx 600 was 0.9% lower and U.S. futures were down around 1.2%. Brent crude was 2.1% higher at $100 per barrel after again crossing $105 overnight. U.S. WTI was up 3.9% at $95. The Dollar’s 0.3% gain was close to the weakest of overnight trading while gold remained 1% higher. Shorter U.S. Treasury yields were leading the curve lower and steeper as futures markets pared expectations for Fed tightening this year. Fed funds futures were pricing in an 80% chance of six quarter-point hikes this year. The 2-year yield was 8.4 bps lower at 1.49% while the 10-year yield traded down 5.4 bps to 1.91%.


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