Another turbulent week for markets is in prospect as investors watch the situation in Ukraine, continue to adjust their portfolios ahead of the Federal Reserve’s first interest rate move next month, analyse earnings here and offshore, all while dealing with the echoes of Covid and its variants.
Shares, bonds and commodities swung in all directions last week thanks to President Putin’s aggressive moves against Ukraine and fears about a bigger than expected lift in rates by the Fed which had faded by week’s end.
Confidence won’t be helped by US markets being closed today because of the Presidents Day Holiday. That means all the action will be outside the US as an escalation in incidents in Russian controlled Eastern Ukraine rise (confected incidents engineered by Russia and its separatist allies).
Wall Street, Friday saw the Dow fell 0.68%, the S&P 500 lost 0.72% and the Nasdaq dropped 1.23% on Friday. All but one of the 11 S&P 500 sectors fell, with the exception being consumer staples.
Energy’s weakness confirms that the boost to oil, gas and coal prices from Putin’s adventures have a limit so far as investors are concerned.
That all saw Wall Street’s three major averages lower for the week by Friday with the Dow off 1.9%, S&P 500 off 1.6% and the Nasdaq down 1.7%.
Energy (surprisingly), communications services and financials were the worst-performing sectors for the week.
In Europe, the pan-regional STOXX 600 share index retreated from initial gains to close down 0.81%, with travel and banking shares leading the decline. MSCI’s gauge of stocks across the globe shed 0.85%, to be down almost 7% year to date.
For the week the STOXX 600 fell 1.9% while Japanese shares fell 2.1% but Chinese shares rose 1.1% as the country basked in the positive propaganda from the Winter Games and ignored the worsening Covid situation in Hong Kong.
As a result, the ASX 200 will open sharply lower today with a 51-point loss pencilled in from futures trading after Friday’s 1% or 72-point slump. The index was up by a tiny 0.06% for the week.
In the bond market, the 10-year US Treasury yield dropped to 1.928%, driven lower by the continuing search for safe havens by investors worried about President Putin and the market closures today. The yield had been well above 2% on Wednesday.
A week ago, the bond market was anxious about the possibility the Fed could lift rates by 0.50% at its meeting next month.
But in the futures market, expectations for a half-point rate increase faded as the week wore on and traders were back to pricing in a quarter-point hike by Friday afternoon.
Comex gold fell back under $US1,900 an ounce where it had been for a day on Thursday. It still ended the week higher, as did Comex copper and silver.
US crude futures fell 69 cents to settle at $US91.07 a barrel, while Brent, the international benchmark, settled up 57 cents at $US93.54 a barrel.
The Aussie dollar ended back under 72 US cents at 71.75. The 10-year Australian bond rose 4 point on Friday to be at 2.24% – an impossibly high yield when inflation remains much lower than in the US.
“Investors are having a hard time holding onto risk as the likelihood that the standoff between the West and Russia will ultimately lead to some ground conflict,” Oanda’s Edward Moya said in a note Friday. “Wall Street will remain jittery until we see a major de-escalation.”
Friday saw the added volatility of trillions of dollars in options and futures on stocks, indexes and ETFs expiring. Option expiration days, which usually happen on the third Friday of each month, can see the market swing in a wide range as these positions are closed out.
The worst-case scenario, after discounting an all-out war, would be Russia occupying most of Ukraine and suffering severe economic consequences, which would slow the global economy, said David Kelly, chief global strategist at JPMorgan Funds.
“You get a spike in inflation but the Federal Reserve will probably see that kind of spike in energy prices associated with more uncertainty as ultimately disinflationary rather than inflationary,” Kelly said.
“As an investor I wouldn’t get out of good long-term investments because of that,” said Kelly according to a story from Reuters.
