Key Takeaways Markets Have Down Week As Escalation Continues in Russia/Ukraine War, Commodity Upside Spooking Markets
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Market Data Insight for Actionable Strategy
The Wall Street Debrief March 4, 2022
Markets Have Down Week As Escalation Continues in
Russia/Ukraine War, Commodity Upside Spooking Markets
Key Takeaways
The S&P 500 closed at 4,328.87 down from 4,384.65 last Friday. The VIX closed at
$31.98 after peaking near $35 during trading Friday.
Markets continue to process the economic implications of Russia’s war in Ukraine.
Markets in Europe were particularly spooked as Russian forces shelled Europe’s
largest nuclear power plant.
Payroll numbers came in above expectations at 678,000; however, wages were
pretty flat. Revisions added 92,000 jobs to the prior two months of gains.
Commodity prices continue to be the main impact of the Ukraine invasion so far and
we discuss some of the economic implications of the unfortunate Russian invasion
of Ukraine.
We are now more than a week into Russia’s invasion of Ukraine and the escalation of
sanctions against the belligerent country occurred faster than some predicted. This was the
sixth straight week of weakness and the terrifying headlines of Ukraine surely are reasons
for apprehension. Russia’s military appears to be having significant logistical problems. This
mixed with a stolid and inspiring Ukrainian resistance has meant that Putin’s progress has
been much slower, and costlier than many military analysts expected. We pointed out some
of the issues that have emerged with his campaign earlier than most in our Signal From
Noise last week. The southern town of Kherson fell, which is the first major urban center to
fall. Kharkiv and Kyiv are still holding out, and Mauripol seems in trouble. Russian progress
has been most quick on the Southern portion of the country. Markets have had a tough week
but are up significantly from their February lows. The glass may be more half-full than you
think.
For important disclosures, see Page 4 Page 1The Wall Street Debrief March 4, 2022
However, as we’ve stated the way markets process these events is often markedly different
than the way we experience them. Despite the choppiness and down-days over the week
Mark Newton, Our Head of Technical Strategy has actually been positively surprised at how
well the market has held up. He sees a breach to the downside of 4,279 as likely portending a
re-test of February lows while a move past 4,417 should lead to a further move up.
The US equity market has been relatively outperforming Europe for the obvious reason of
geographic proximity to the instability. Some US firms like Black-Rock and others who are in
the ETF business have been reporting difficulty in liquidating any Russian assets given the
unprecedented sanctions and also restrictions from Russian officials. However, it is thought
that the risk for financial contagion in the United States from sanctions fall-out should be
relatively low. The commodity impact from the raging conflict in Ukraine could potentially be
the largest interruption of commoditiesin history. Wheat futures had their largest weekly rise
since the 1950s and Russia and Ukraine together account for nearly a third of global wheat
exports. Whether the conflict is a sustained affair or if it is resolved over the shorter term will
have a great bearing on what the scale of the impact will be.
US officials said on Friday that they believe the US economy is strong enough to weather a
ban on the import of Russian oil. Russia produces about 12% of the world’s total supply of oil.
The Whtie House pointed out, that given existing supply chains, the US doesn’t import very
much Russian oil in the first place. There was some alleviation of pressure on oil prices on
Thursday as a deal with Iran was rumored. According to some diplomats, a nuclear deal with
Iran is days away. However, Thursday to Friday saw the biggest overnight increase in prices
at the pump since Hurricane Katrina in 2005. Gas prices have surged to their highest levels
since 2012 at $3.84 a gallon for regular. President Biden addressed this issue in his State of
the Union address and released more money from the Strategic Petroleum Reserve. There
are nine states where gas is over $4 a gallon including New York, California, Illinois, and
Pennsylvania.
There was a particular alarm on Thursday night when Russian soldiers were shelling Europe’s
largest nuclear power plant. Ukraine was the location and epicenter of the Chernobyl nuclear
disaster in the late 1980s, so this event is particularly impactful for them. The United Nations
condemned the action on Friday. It appears that the very last carve-out from sanctions for
Russian Energy is collapsing as their aggression, civilian casualties and recklessness seems
to only intensify. Russian opposition to the war seems to be building as well, but this may be
mitigated by a new law passed that basically assigns a 15-year prison sentence to report any
alternative narratives to the war than those farcical ones approved by Putin’s increasingly
isolated regime.
Page 2The Wall Street Debrief March 4, 2022
Markets got some relief due to Jay Powell’s testimony before the House and Senate. He
pretty much removed speculation of a 50 bps hike and said the committee would have to be
“nimble” in response to the chaotic situation in Ukraine. While there was a definite dedication
detected to continue fighting inflationary pressure, Powell’s comments were still
incrementally more dovish than what the Fed Funds future has been pricing in a few weeks
ago. Some Fed officials have also said that the Ukraine War likely will only further the need
for hawkish action from the Fed as it could be a major source of additional economic
pressure.
Economists appear to be revising their inflation expectations upward for March. Russia is a
particularly important producer of many commodities from Wheat and Energy to precious
metals vital in many industrial supply lines like Palladium and Nickel. As Western
Governments prepare to remove the last hold-out in their economic warfare tool chest, the
inflationary effect of particularly the rising price of oil could cause inflation to peak later than
it would have. Oil prices are particularly impactful for overall inflation because they touch
vital aspects of the economy like transportation, manufacturing, power generation,
chemicals, and materials. According to JP Morgan’s Chief Economist, Bruce Kasman, the
rough way to think about the price impact from rising oil prices is that for every 10% increase
in the price you could remove about .2% from global growth expectations and add about .3%
to CPI. Kasman was one of many economists to raise his inflation forecast since the war
broke out. The impact of metals and grains is harder to measure because of the complexity
of supply lines. Natural gas getting cut off from Europe is of course a potentially huge impact.
Dutch and British natural gas futures are up 1,000% in the past year compared to less than a
tenth of that in the United States. Investors have sought safety in bonds and Treasury yields
dropped. The spread between the 2-yr and 10-yr hit its lowest level since March 2020 on
Friday as concerns ostensibly rise about inflation sapping growth.
Page 3The Wall Street Debrief March 4, 2022
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Page 4The Wall Street Debrief March 4, 2022
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