Oily markets

Markets sold off on Friday with intensified fighting in Ukraine. US employers added more jobs than expected last month, but the news was not good enough to calm stocks.

Easy peasy… budget squeezy.  What’s old news? Interest rates are going up…statutory interest rates that is. If you were stranded on a desert island for the past 12 months, you might have missed it. Inflation is soaring and the Fed has acknowledged that it may be a problem, so they are going to raise interest rates…slowly…to help tamp down the upswell. Just a few short weeks ago, traders put a high probability of not just the Fed raising rates later this month, but that the Fed would raise rates by a ½ percent, which is rare based on its recent behavior. The market had absorbed the news and was prepared to tackle it head on. Earnings season was strong and COVID restrictions were being relaxed. And then came Russia’s invasion of Ukraine. It’s not as if Russian tanks haven’t been amassing on Ukraine’s borders for what may even be months …they have been, but who would have believed that Russia’s Putin would actually invade his neighbor and bomb innocent civilians in Ukraine’s major city centers? I would venture to guess that many were caught off guard when we learned of the tanks rolling over the border a little over a week ago. Of course, a major geo-political shock like that would cause volatility in the stock market. It is not the results as much as the unknowns which is abhorred by markets.

Back to rates for a moment. Last week was the final hurrah for the very outspoken Fed to well… speak out. Fed members are now in a blackout period ahead of their March 16th meeting. Their message was pretty clear that rates are going to rise. Chairman Powell made a pretty strong case for a +25 basis point hike, given the recent unrest in Eastern Europe. That said, according to Fed Funds futures, there is now a 94% chance of a +25 basis point hike resulting from next week’s meeting. The chances of a +50 basis point hike are at 0%, though they were at 60% in the middle of February. By February 24^th, the first official day of the Russian invasion, that probability had eroded to just 12% and by Monday of last week, those chances were down to 0%, where they stand today. That is clearly not old news, and one would expect markets to react positively to the news…except for the fact that the Russian invasion has intensified rapidly, and with it…new uncertainty.

Aside from the repulsive human tragedy, what exactly is the uncertainty that is vexing markets.  Stocks are actually slightly higher since the Russian invasion, though I suspect you would have guessed that they would have been down, given the spike in volatility since the 24^th. It is true that the volatility has intensified along with the saber rattling, but what really has the market irritated are the sanctions. Stocks have contended with invasions before. Add to that pandemics, inflation, and rate hikes. But not all at the same time. Further, add to that the massive global support for sanctions and embargos on the aggressor, which happens to be the 11^th largest economy and the 3^rd largest energy producer.  Now, that is a recipe for a cocktail called: uncertainty. Markets are hypothesizing that all exports from Russia and Ukraine will be removed from global supply. Principal amongst those exports is crude oil, natural gas, wheat, corn, potash, aluminum, steel…you know, all those basic industrial commodities needed for food, heating, transportation, farming, and infrastructure. Lower supply is a key ingredient of inflation! Over the weekend as the fighting intensified, more and more US lawmakers are calling for a complete Russian oil embargo. That caused the price of crude oil futures to spike briefly over $130 / barrel.  You may recall that those same futures were briefly negative less than 2 years ago. Roughly 3.5% of US crude supply comes from Russia.  Though it can surely have a temporary impact on domestic oil supply, one could hardly make a case for longer lasting price gains. The EU, on the other hand, is much more reliant on Russian oil, which makes up around 25% of its imports. Removing 25% supply can certainly cause prices to spike higher…for longer. Can those economic woes spill over into the already economically challenged US? No one knows the answer to that question just yet, and that uncertainty is…abhorred by markets.

WHAT’S SHAKIN’

Occidental Petroleum Corp (OXY) shares are trading higher by +10.65% in the pre-market after weekend reports surfaced that activist investor Carl Icahn has sold his remaining stake in the company just as Warren Buffet’s Berkshire Hathaway revealed an increase in its holdings in its latest disclosures. The energy company has already been on the rise with the recent spike in crude oil prices resulting from the Russian invasion of Ukraine.  Dividend yield: 0.93%.  Potential average analyst target price upside: -17.9%.  WHY IS THIS NEGATIVE?  Because the current share price is higher than the average 12-month analyst price target for the company.  While that may be interpreted as the stock being overpriced, it does not mean that the price may not continue to rise.

Ciena Corp (CIEN) is trading lower by -1.43% in the pre-market after it announced that it had beat EPS targets by +4.11% but missed Revenue estimates by -1.65%. In the past month 25% of analysts have changed their price targets, 2 up, 2 down, and 12 unchanged. Potential average analyst target price upside: +22.7%.

FRIDAY’S MARKETS

Stocks closed lower on Friday as the fighting in Ukraine intensified. The S&P500 fell by -0.79%, the Dow Jones Industrial Average lost -0.53%, the Nasdaq Composite Index dropped by -1.66%, the Russell 2000 Index gave up -1.55%, and the S&P500 ESG Index declined by -0.88%. Bonds rallied and 10-year Treasury Note yields fell by -11 basis points to 1.73%. Cryptos declined by -5.91% and Bitcoin fell by -6.42%.

NXT UP

• No economic numbers today. Later in the week, we will get more earnings, albeit sparse, in addition to JOLTS Job Openings, Consumer Price Index, and University of Michigan Sentiment. Refer to the attached economic and earnings calendars for times and details.