European and US futures are trading almost flat as investors grapple with Russia’s decision to invade Ukraine. Following reports of Russia’s military actions, equity markets around the world fell, with investors simply placing sell orders and asking questions later on. Despite the scare we witnessed yesterday, the S&P 500 was able to close yesterday’s session nearly 1.5% higher after falling 2.6% earlier in the session. Similarly, the Nasdaq index closed 3.3% higher after dipping nearly 3.5% on Thursday. The Dow Jones Industrial Average and Russell 2000 index also jumped 0.28% and 2.67% in yesterday’s session.
Investors should keep in mind that, while stock market volatility may rise in the short term, such events typically have short-term consequences and, as a result, should be viewed as buying opportunities as long as they are not followed by a recession. The United States’ economy entering a recession is highly unlikely, given that companies are reporting strong earnings and the spread of coronavirus cases is under control.
The most important event of the day is the core personal consumption expenditures (PCE) data to be released today, which shows the change in the price of goods and services excluding food and energy. Inflation has been growing rapidly in the United States over the past few months, owing to a surge in consumer demand and supply chain bottlenecks being faced by nations around the world. Moreover, it is one of the most important factors taken into consideration by the Federal Reserve while deciding on its upcoming monetary policies. If the numbers come in above expectations, it will give the Fed all the more reason to stick with its monetary tightening policies and raise interest rates aggressively going forward.
In addition to the inflation numbers, stock traders will also be digesting durable goods orders data and revised consumer sentiment numbers to understand how the American economy is likely to perform over the next few months.
Following the military action undertaken by Russian forces in Ukraine, the United States of America imposed more sanctions on Russia, aiming to put its economy under pressure and exclude it from the global economy. The new restrictions include steps to hinder five big banks in Russia from accessing foreign currency. However, crude oil supplies from the country have not been sanctioned as of yet. In addition to the sanctions put in place, Washington has also approved more forces to be placed in Germany so that the invasion does not spill over to other European regions as well. Similarly, other NATO countries have also ramped up their security in Europe.
Stock traders are now bracing for a potential surge in consumer prices and a curb in global economic growth because of the Russia-Ukraine conflict and a probable ramp up in sanctions by western nations. This is due to the fact that both Russia and Ukraine are major grain exporters, and Russia is the largest supplier of oil in the European Union. As a result, any disruptions in the supply chain of these commodities will almost certainly drive inflation much higher. As a result, the most pressing question is how the Fed will react to the Russian invasion and its potential impact on inflation, which was already rising rapidly prior to the conflict. The uncertainty resulting from these developments is likely to make stock markets volatile in the short term.
Similar to the broader equity markets, cryptocurrency markets also climbed on Thursday, wiping off their earlier losses as investors shrugged off worries resulting from the Russia-Ukraine dispute. On Thursday, the price of bitcoin slumped to nearly $34,700, and currently it is trading near $38,800. Similarly, Ethereum has also risen and is hovering around $2,600.
Even before the Russia-Ukraine conflict, prices of cryptocurrencies had been under immense pressure due to a hawkish Fed and an aggressive tapering of bond purchases, which will likely lead to interest rate hikes next month. As a result of these measures, liquidity is being withdrawn from financial markets, restricting the ability of investors to take positions in risky assets. This change dragged the price of bitcoin down from its unprecedented peak of nearly $69,000, reached in November last year.
Crude oil prices jumped following news that Russia had started invading Ukraine on Thursday, pushing the price of Brent above $100 per barrel for the first time since 2014. However, oil prices dipped following reports that sanctions were not placed on crude oil supply from Russia. However, the risk of more restrictions being placed on energy supply from Russia is likely to make crude oil prices volatile over the next few weeks. This is because Russia is among the world’s biggest producers of oil and natural gas. It is also the second-largest producer of natural gas in the world.
The Russia-Ukraine conflict is driving up the price of gold as investors seek to protect their wealth from volatile equity markets and rising consumer prices. Today, the price of gold is likely to be sensitive to inflation numbers in addition to geopolitical tensions, as a higher reading will only encourage the Fed to stick to its plan of raising interest rates this year. As a result, inflation readings will likely cap significant upside movement in gold prices because, as interest rates rise, the opportunity cost of holding non-interest-bearing gold also rises, making it less appealing to investors.
Just like gold, the U.S. dollar has also been appreciating in value, mainly because of its safety appeal to investors. It surged to as high as 97.74. Investors should also keep in mind that ECB President Christine Lagarde is also scheduled to speak today, providing her views on the Russia-Ukraine conflict. Investors will be looking for hints regarding future monetary policy by the ECB, and any hawkish remarks could cause volatility for the euro.
Asian Pacific Markets
Following the historic regulatory crackdowns by Beijing on technology companies in 2021 that caused turmoil in Chinese stock markets, Alibaba has decided to focus on retaining its customer base rather than driving growth. Investors should also note that despite the unprecedented crackdowns, Ant Group was likely able to raise its profits by an estimated 21% between August and September last year.
As of 12.23 a.m. EST, the Nikkei jumped 1.88% and the Shanghai index climbed 0.78%. The Hang Seng index, in Hong Kong, dipped 0.12%. The ASX 200 index hopped 0.03%, while the Seoul Kospi rose 1.16%.