Stock Market Today
US and European futures are down as investors are concerned about the Russia-Ukraine conflict and what it will mean for stock markets in the coming days. Besides that, stock traders were already on edge after seeing the highest inflation reading since 1982, implying that the Federal Reserve will likely increase the number of interest rate hikes in 2022. Despite geopolitical tensions and aggressive monetary tightening, stock markets are supported by strong corporate earnings and an optimistic economic outlook. In the short term, these factors are likely to support investor sentiment.
In yesterday’s session, the Dow Jones Industrial Average declined 0.49%, and the S&P 500 index dropped 0.38%. The Nasdaq, the tech-savvy index, remained unchanged, and the Russell 2000 dipped 0.46%.
The most important event of the day for investors is the release of producer price index (PPI) numbers today. Moreover, investors will be digesting the German ZEW economic sentiment numbers to better understand how the European region is performing and how European stock markets may perform in the coming months.
Ukraine’s President, Volodymyr Zelenskiy, alarmed investors by asserting that he had heard that Russia would attack Ukraine Wednesday. His office later clarified, however, that the President was being sarcastic. Furthermore, diplomats in Russia and worldwide are attempting to persuade Russian President Vladimir Putin to continue his dialogue with Western nations, arguing that a peace settlement is still possible.
Investors should keep in mind that if the dispute between Ukraine and Russia is resolved somehow, stock markets may experience a rally. This rally, however, is likely to be brief because there are still numerous factors at play that could spark volatility and trigger sell-offs in the coming months. This is precisely why the demand for safe-haven assets such as gold and the US dollar continues to rise.
Apart from the geopolitical tensions, fears of rapidly rising interest rates are also dragging investor sentiment down. As James Bullard, President of the St. Louis Fed, the American central bank should bring forward its timeline to raise interest rates to curb consumer prices from climbing any higher. Forecasts of the Fed’s becoming more hawkish are precisely why investors are moving away from high-growth stocks to stocks more positively correlated to economic cycles.
Looking at the most recent data, we can see that the volatility of bitcoin is much less than the volatility we have seen related to the Nasdaq index. In 2022, the price of bitcoin has moved one standard deviation away from its five-year mean just five times, whereas the Nasdaq index has moved one standard deviation 12 times in the same period.
The main reason behind this phenomenon may be that much of the leverage in crypto markets may have been sucked out during the massive sell-off we witnessed last year when the price of bitcoin fell nearly 50% from its all-time high. On the other hand, the worst decline that the Nasdaq index saw was a 15% fall. Hence, there may still be a lot of leverage among the biggest stocks in the tech-savvy index. Both asset classes are still very strongly correlated, with bitcoin’s correlation with the Nasdaq 100 over the last 40 days hovering around its all-time high.
Crude oil prices climbed nearly 2% yesterday as the situation between Russia and Ukraine appears to be getting out of hand. The United States is still unclear whether Russia is interested in a diplomatic solution and looking to deescalate the tensions between the two states. The United States has also relocated its embassy in Ukraine following the surge of Russian troops in the region.
The price of oil is susceptible to the geopolitical situation because Russia is among the biggest oil producers, capable of producing nearly 11.2 million barrels per day. Thus, any disruption in the supply from the region could push oil prices even higher, as currently, even keeping the dispute aside, demand is outstripping supply. Hence, any conflict could push oil prices much higher than the expected $100 a barrel in 2022.
Asian Pacific Markets
The economy of Japan grew at a rate of 5.4% on a year-over-year basis in the last three months of 2021. However, the actual growth was still lower than the forecasted GDP growth rate of 5.8%. As of 12.34 a.m. EST, the Nikkei slumped 1.17%, and the Shanghai index hopped 0.11%. The Hang Seng index in Hong Kong dipped 1.26%. The ASX 200 index fell 0.51%, and the Seoul Kospi dropped 1.32%.