Good morning contrarians!
Stock futures are pointing to modest gains at the open a day after the Nasdaq dropped 3.6% and officially entered a bear market. Bear markets are defined as 20% losses from the all-time high. The Nasdaq actually entered this territory briefly last week, but this was the first close at bear market levels. Dow Industrials (-2.4%) and S&P 500 (-3%) suffered as well but remain “only” in a correction (defined as drops of 10% from the top).
Once again, exogenous forces have caused the market melt-down. This time it’s the Russian invasion of Ukraine that is to blame. That makes it twice in two years now that this type of thing has happened, and comes roughly on the two-year anniversary of the last occurrence — it was right around this time in March 2020 when COVID lockdowns began for real. That bear market quickly reversed after the Federal Reserve turned its liquidity firehouse on it. This time around, the Fed has no such luxury as interest rates are already at 0 and the U.S. faces inflationary pressures from all sides.
The problem is quite simple: Uncertainty over Russia’s invasion of Ukraine, its impact on commodity supply chains, and the ensuing fallout for the global economy. We got into all that in some detail yesterday so no need to repeat it again here. The point is that unless there is some clarity over the conflict it’s hard to see where a relief rally can come from.
Nickel ATH, Trading Suspended
To wit, commodities are continuing their ascent (feels like I have literally written this line every day since the invasion. Probably because I actually have). Today the problem is most pronounced in the nickel market, with the London Metals Exchange suspending trading after prices doubled to reach an all-time high. Crude oil is up 3% to trade around $123/barrel. Palladium is up another 5%. Gold, silver, and platinum trending higher as well.
The International Energy Agency has put together a 10-point plan for Europe to reduce its reliance on Russian supplies. Some of the stuff is pretty technical, some obvious (more nuclear power, tax breaks for wind and solar). No mention of procuring the stuff from Africa so that punt on Africa Oil (AOIFF) will probably not go anywhere quite yet (though a Wall Street Journal story does mention Europe needing to import more from “the North Sea, West Africa, and the Middle East to replace lost barrels”).
Russia for its part is warning of $300/barrel oil (“if not more”) if western countries proceed with cutting it off and is saying it could close off a major pipeline to Germany. Already prices at the pump in the U.S. are flirting with the all-time high set in 2008. Think that was around $4.10/gallon or so? Adjusted for inflation we’re already there of course.
Corporate Events
There are a few earnings reports to distract us, but would not expect these to move broader markets. Dick’s Sporting Goods (DKS) is due out this morning before the open. Later we’ll hear from Petco Health and Wellness (WOOF), Casey’s General Stores (CASY), and Ulta Beauty (ULTA).
We also have an Apple (AAPL) event today. The company is expected to announce a new iPhone, iPad, and maybe Mac models. Wouldn’t expect too much of a distraction from that as the spring events are not as big a deal as the fall ones.
The Bottom Line
The bond market is showing signs of a potential relief rally, with selling across all maturities. The 2-year yield is up 4 basis points to 1.61% whilst the 10-year is up 10bps to trade around 1.85%. Still a long way from the highs that we saw pre-invasion, but it is something. Though it’s worth noting that we’ve seen spikes like this in the yield before, most notably last week.
More importantly, there doesn’t appear to be any kind of catalyst for this move in bonds. Russia and Ukraine are continuing to speak but progress has been fleeting. The latest is Russia apparently having signed off (again) on a humanitarian corridor for refugees to leave Ukraine. Two million have already done so.
It’s unclear how much time we have before the higher commodity prices bring in ‘demand destruction’ and take the global economy down with it. Estimates vary for different regions. The U.S. may have a little more time than Europe and Asia. Either way, the clock is ticking and it’s hard to see how there will be any kind of sustained rally in risk assets until the situation clarifies.
Nasdaq Enters Bear Market: Daily Contrarian, March 8