- Wall Street and European market reverse losses
- Russian markets also rebound
- Oil prices dip back to $101
Epic turnaround: the Nasdaq Composite entered bear market territory, then reversed, turning a 3.5 per cent loss into a gain of 3.3 per cent for the session. The S&P 500 also rallied off its lows to rise 1.5 per cent, the Dow Jones rose 0.3 per cent and the small cap Russel 2000 managed a gain of 2.6 per cent. European markets have bounced this morning, taking their cue from Wall Street and a largely positive session for Asia. Russia’s MOEX +20 per cent this morning and RTSI +25 per cent… relief all round. Oil prices also fell sharply from yesterday’s highs as Brent topped $105 before sliding under $98. This morning it’s back up at $101 or so. Wheat is back down a bit after hitting its highest since 2008, gold closer to $1,900 after spiking to $1,975 yesterday. The USD is gaining a bit of ground this morning though as risk mood remains very much on edge… Russia does not seem to have done as much in its first day as it would have hoped and fears grow for more protracted, bloody battles ahead.
Reasons for the turnaround? Chiefly we can say that markets sold off aggressively early yesterday on fear – fear of sanctions rather than a fear for the future of Ukraine. The absence of any sanctions on Russia oil and gas, and decision to not exclude the country from the Swift payments network left the market breathing a sigh of relief as to the global economic impact the invasion might have. It’s sad to say the market does not care particularly about the plight of Ukrainians. We could also say that the market looked oversold and buy the dip still pervades... many think invasion is the time to be buying not selling. Haven bid for bonds keeping yields down may also be a temptation for investors looking at beaten-down tech names. There was a bit of baby and bath water too; mega cap tech charged higher - Amazon (AMZN) +4.5 per cent, Microsoft (MSFT) +5 per cent, Alphabet (GOOGL) +4 per cent - as traders thought these were too much a part of indiscriminate selling.
It’s hard to get a real handle on where we are right now – the market reaction reflects the wide range of potential outcomes, ie uncertainty over what happens on the ground as well as sanctions. Truth is most market participants are not experienced in what we face today: war + inflation... this is late 70s/early 80s type territory. Big question right now is whether central banks slam the brakes on their nascent hiking cycles. This could give some relief to tech/growth but could unleash further inflation pressures on the demand side, adding to the increasing cost-push supply side inflation we are encountering. Certainly we saw some small bid for tech/growth yesterday emerge as traders backed into some stocks that have really taken a bit of a pounding on the inflation-hiking narrative we’ve been seeing YTD.
Inflation... the invasion is a big negative for anyone who thought that inflation has peaked. Surging oil and gas prices show no signs of slowing... ECB Governing Council member Gabriel Makhlouf said the central bank was likely to agree on a faster wind-down of asset purchases at its March meeting but agreement on when to raise rates are less clear. ECB’s Holzman said war could slow down tightening, keep QE going longer. Yields have come off as bonds found some haven bid on the Russian attack, but traders are not pulling their tightening bets just yet with market pricing still pointing to 6 hikes this year by the Fed and 5 by the Bank of England. Just the one for the ECB. What I would say is that the very aggressive, 50bps type chatter has died down a lot since Russia escalated. The Fed will be treading a bit more carefully again. It will probably be ok with that and can blame inflation on Russia. But it will still be hiking. Core PCE inflation figures due at 13:30 GMT today.
Neil Wilson is the Chief Market Analyst at markets.com
