- Major equity indexes advance; transports, banks outperform
- All major S&P 500 sectors green: financials, materials lead
- Dollar, gold, crude down; bitcoin gains
- U.S. 10-Year Treasury yield rises to ~2.00%
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INDIVIDUAL INVESTORS ASSESS RUSSIA/UKRAINE SITUATION (1345 EST/1845 GMT)
As part of the most recent American Association of Individual Investors (AAII) Sentiment Survey read more , AAII asked its members how the situation with Russia and Ukraine is impacting their short-term outlook on U.S. stocks. Of note, the survey period ended on Wednesday, or just prior to the actual Russian invasion.
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AAII reported that half (50%) of respondents said that the unfolding events in Ukraine are giving them “a bearish outlook on stocks.” Many of these respondents stated that they are becoming “more cautious and view the situation as dangerous.”
Against this, 25% of respondents said that the Ukraine crisis is having “no impact on their outlook for stocks” because they believe the situation “is very short-term and are heavily focused on the long term.”
Around 13% have a “mixed outlook.”
Meanwhile, roughly 7% of respondents have a bullish outlook and view the situation involving Ukraine and Russia as “a buying opportunity or a short-term blip.” Lastly, about 6% of respondents fell into the “other” category.
Here are a couple of investor quotes on the matter:
“If Ukraine is invaded by Russia, then the market will go down to a level that investors are comfortable with on a risk/reward basis. The market will rally based upon stability coming to the Ukraine-Russia issue and then economic growth and profitability will determine the next leg up or down.”
“I think the issue will be resolved within the next six months, and the coronavirus pandemic will be gone. After those two issues are finished, the stocks will be going back into a bull market.”
FRIDAY DATA: MANUFACTURING HEALTHY COURSE, PRICE PEAKS ELUSIVE, CONFIDENCE HAS HEADWINDS (1216 EST/1716 GMT)
Among Friday’s U.S. economic data releases was a read on durable goods, as well as PCE chain price indexes, and consumer sentiment.
January durable goods orders rose 1.6% vs a 0.8% estimate, while December’s decline was revised from a 0.7% fall to a 1.2% gain.
According to Nancy Vanden Houten, lead economist at Oxford Economics, core orders signaled that business equipment spending will continue to grow.
“US business investment continued to advance. Core orders – nondefense capital goods orders excluding aircraft – rose 0.9% to a record high. Core shipments – our preferred business investment gauge – grew a robust 1.9%, pointing to strong equipment spending growth.”
With this, Vanden Houten expects that strong goods demand and plenty of backorders will keep manufacturing on a “very healthy course” even as spending tilts toward in-person services.
Additionally, she expects to see better supply-side news as shipping bottlenecks slowly clear, input shortages diminish, and Americans warm up to the job market.
However, she adds that “we should be mindful that supply chain and labor woes can’t be resolved overnight, and the Russian invasion of Ukraine may prolong supply-chain bottlenecks.”
As for price indexes, the January core PCE price index month-over-month came in at 0.5% vs a 0.5% estimate. On a year-over-year basis it was 5.2% vs a 5.1% estimate.
As Mike Englund, chief economist at Action Economics, sees it, “The peak in the y/y measures has proven illusive, but we suspect that a peak will be reached in February or March as the steep recent run-up in energy prices works its way into the indexes. As we move forward from February, comparisons will become much easier.”
Finally, in terms of confidence data, the February U Mich final read was 62.8 vs a 61.7 Reuters poll.
Mahir Rasheed, U.S. economist at Oxford Economics, said the final February reading “confirmed that households haven’t been this pessimistic about the economy in over a decade as inflation continues to erode personal income prospects.”
He added that the print was “exacerbated by a storm of headwinds including lower confidence in the government’s economic policies and awareness of rising interest rates.”
Rasheed noted that with most of the interviews conducted prior to Russia’s invasion of Ukraine, its impact on sentiment won’t be felt until the preliminary March reading.
EUROPE POSTS WEEKLY LOSS DESPITE REBOUND (1155 EST/1655 GMT)
Despite a sea of green after today’s rebound, the European STOXX 600 index (.STOXX) lost 1.7% this week, its third worst weekly performance since November 2021’s Omicron scare.
Closes were positive for upwards of 90% of constituents, despite the day’s news being anything but, amid Russia’s ongoing invasion of Ukraine.
Investors reacted positively to news of coordinated Western sanctions on Russia, with banks in focus and the energy sector largely spared. Oil prices fell back below $100 a barrel after soaring on Thursday as concerns over supply disruptions eased.
Utilities led today’s gains in Europe, closing up almost 5%. The sector proved defensive compared to others on Thursday, the worst day of this week which saw the STOXX 600 lose 3.28%.
Eurozone banks were particularly hard-hit amid Thursday’s fallout, but regained footing to close up today by 4.2%.
AFTER CREDIT SPREAD WIDENING, WELLS FARGO SEES BUYING OPPORTUNITY (1130 EST/1630 GMT)
Concern about Russia’s invasion of Ukraine has dented risk appetite in recent weeks and sent corporate credit spreads wider. Wells Fargo says this presents a short-term opportunity to buy credit, noting that geopolitical events tend have short-lived effects on markets.
“Recent developments of perhaps a full-scale ongoing Russian invasion of Ukraine have material negative short and medium term humanitarian consequences as well as potentially longer term implications for geopolitical tensions elsewhere,” Wells Fargo credit strategists Hans Mikkelsen and Logan Miller said in a report.
“However in financial markets the impacts of geopolitical conflicts historically tend to be shallow – on the order of stocks on average down ~5% – and short lived – typically retraced within a few weeks,” they added.
Stocks have recovered from their lows reached on Thursday, but remain below where they were when fears of an invasion were first flagged.
Wells Fargo notes that most of the market reaction dates from Friday, Feb. 11, when the U.S. warned of possible Russian military action against Ukraine the following week. “Over this roughly two week period the S&P 500 is down 4.8%, or -8.8% measured for futures at the overnight low,” the analysts said in a note sent late on Thursday.
Investment grade (IG) and high yield (HY) credit spreads widened 15 basis points and 24 basis points, respectively, over the same period. Now, IG credit spreads are near the wide end of their non-recession range, while HY spreads are near the bank’s targets.
As a result, Wells Fargo said it is tactically long credit for the next one or two weeks “on the expected fading impact of geopolitical risk on financial markets,” saying that IG and HY spreads should retrace 10 basis points and 20 basis points, respectively.
The bank added, however, to keep trade sizing small given uncertainties around the situation and “as mistakes are easily made in a conflict like this.”
WHAT’S IN $300 BILLION? (1045 EST/1545 GMT)
Though Russia might have sold down its exposure to the gigantic U.S. Treasury bond market in recent years, there are tell tale signs that the proceeds from these sales have flowed into the arcane world of FX swaps.
According to estimates by Credit Suisse’s Zoltan Pozsar, Russia holds about $300 billion in short-term money market instruments: $200 billion in FX swaps and another $100 billion through public and private deposits.
With sanctions threatening the Russian financial system, that money could move quickly and is “enough to push spreads around in funding markets,” Pozsar, who heads short-term interest rate strategy at the bank, wrote in a note.
“$300 billion – in the extreme – can either be potentially trapped by sanctions, or moved somehow from West to East to avoid being trapped by sanctions”, he wrote, adding that “each would be a market event.”
(Julien Ponthus and Saikat Chatterjee)
NOT SO SWIFT YET – WHY THE WEST IS NOT YET READY TO USE ITS SHARPEST SANCTIONS? (1012 EST/1512 GMT)
As Russia makes inroads into Ukraine, the West is under pressure to further toughen its sanctions, including cutting Moscow out of SWIFT, a global network used by almost all financial institutions worldwide to wire sums of money to each other and is a cornerstone of the international payments system.
Britain’s Boris Johnson said on Thursday he intended to work with allies to shut off Russia’s access to SWIFT, while other European countries like Germany still have some reservations. read more
While U.S. President Biden said it remained an option, Daniel Tenengauzer, head of markets strategy at BNY Mellon, believes that the U.S. will likely seek a more surgical approach given that SWIFT sanctions would have a “meaningful long-term impact on the USD as a reserve currency.”
Another deterrent, according to Tenengauzer, is that Russia has already set in place a framework to absorb flows in case local financial institutions are blocked from SWIFT, including a domestic credit card payment system (“Mir”) and the System for Transfer of Financial Messages (SPFS).
BNY Mellon said that iFlow has registered the third-largest net outflow of Russian government debt over the past quarter and noticed two main escalations over the past week. One, Russian government debt may not be transacted in secondary markets between U.S. persons and, two, the largest financial institutions no longer have access to global capital markets.
Nonetheless, the nuclear option of SWIFT sanctions remains out of play so far.
(Bansari Mayur Kamdar and Lisa Pauline Mattackal)
STOCKS GAIN BROADLY, BUILDING ON THURSDAY’S LATE RALLY (1000 EST/1500 GMT)
U.S. stocks are building on Thursday’s reversal/rally in early trade Friday as Russia said it would enter into talks with Ukraine, a day after Moscow launched a massive invasion of its southern neighbor.
Russia is ready to send a delegation to the Belarusian capital Minsk for talks with Ukraine, Kremlin spokesman Dmitry Peskov said on Friday. It comes as Russian missiles pounded Kyiv on Friday, families cowered in shelters and authorities told residents to prepare Molotov cocktails. read more
The West responded to the invasion with a wave of sanctions on Thursday, impeding Russia’s ability to do business in major currencies but leaving its energy sector largely untouched.
Of the 11 major S&P 500 sector indices, energy (.SPNY), financials (.SPSY) and consumer staples (.SPLRCS) are the strongest performers. Consumer discretionary (.SPLRCD) and information technology (.SPLRCT) are the weakest.
BEARS, BEARS EVERYWHERE (0900 EST/1400 GMT)
The percentage of individual investors describing their six-month outlook for the U.S. stock market as “bearish” hit a fresh nine-year high in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, optimism bounced, but remains “well below normal levels.”
Of note, the AAII survey period runs from Thursday to Wednesday, so it concluded just before the Russian invasion of the Ukraine.
In any event, AAII reported that bearish sentiment, or expectations that stock prices will fall over the next six months, surged 10.5 percentage points to 53.7%. This is bearish sentiment’s 14th-straight week above its historical average of 30.5%. Pessimism was last higher on April 11, 2013 (54.5%).
Bullish sentiment, or expectations that stock prices will rise over the next six months, gained 4.1 percentage points to 23.4%. Optimism is below its historical average of 38.0% for the 14th-consecutive week. “It remains at an unusually low level for the seventh-straight week.”
Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, dove 14.6 percentage points to 22.9%. “This is the first week neutral sentiment is below the breakpoint between typical and unusually low levels (23.1%) since April 15, 2021 (21.6%).” The historical average is 31.5%.
With these changes, the bull-bear spread slid to -30.3 from -24 last week read more . The spread was last lower on April 11, 2013 (–35.2%):
AAII noted that the S&P 500 index (.SPX) has gone on to see above-average and above-median returns during the six- and 12-month periods in the wake of “unusually low” bullish sentiment readings and for the bull-bear spread.
Additionally, AAII added that “unusually high” bearish sentiment readings have been followed by above-average and above-median six-month returns in the S&P 500.
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Terence Gabriel is a Reuters market analyst. The views expressed are his own
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