Stocks rallied yesterday as oil prices slumped and treasury yields halted their race higher. Producer prices are +10% higher than a year ago, according to the latest Bureau of Labor Statistics report… markets expected it.
Living on the edge. Would it be fair to characterize the current geopolitical and economic climate as being…fluid? I think so. In the markets, there are periods of business as usual. One, maybe two major market drivers competing for the attention of trader emotions to move markets one way or another. When I meet some of my regular readers, talking about my daily note, I sometimes admit to them that there are days when I want to simply write “same as yesterday, have a nice day.” I am sure that you would agree that those types of days have been quite scarce in the past 2 years.
Yeah, it has been 2 years. It has been 2 years since the pandemic surged into the markets, causing chaos…and lots of selling. I can remember this very week in 2020, during which the S&P500 dropped by some -12.52%. In those weeks, 5+% intraday market swings became the norm. The situation would get worse from a health perspective. Likewise, with the economy, as lockdowns quite literally put the economy on ice resulting in millions of job losses and threatening the extinction of entire sectors. For the markets, things would begin to improve later in March and throughout the spring. To follow, were ups and downs, virus surges, presidential elections, trips into space, NFTs, meme stocks, vaccines, recovery, pullback, more surges, boosters, and thankfully, more recoveries. It was a grind. The recovery and reopening ushered in some new worries that haven't been experienced in decades. We witnessed epic supply chain disruptions in just about every imaginable industry. Those outages led to increased production costs. Combined with the increased demand in the reopening, the supply chain friction led to inflation…bad inflation...at levels not seen for 40 years. The Fed played a principal role in rescuing the pandemic-stricken economy with unprecedented monetary stimulus. The Fed now finds itself in a new role. Today, the Fed is expected to raise interest rates for the first time since 2018. It is never easy for markets to digest rate hikes and monetary tightening, despite the fact that a monetary tightening cycle is not necessarily a novel event for them.
That was the challenging environment until the final days of February when Russia, astonishingly invaded Ukraine. Chaos erupted in the markets which slowly factored in the spike in geopolitical risk. The world, with a few notable exceptions, is now waging what is referred to as a hybrid war against Russia which includes massive and unparalleled economic weapons. Energy costs had been on the rise for the better part of the past year, a result of tight supply and increased demand from the reopening of the economy. Similarly, a semiconductor shortage has led to rising prices in just about everything that requires semiconductors…which is just about… everything. The Russian attack on Ukraine has made those economic challenges far more acute. Russia is the 3rd largest energy producer in the world. Russia and Ukraine are also some of the largest exporters of wheat and corn…and the critical materials needed to manufacture already-backordered semiconductors, which as aforementioned, are in just about everything. Don’t worry, markets are attempting to digest those challenges, along with the Fed tightening and continuous destruction happening in Ukraine. Last week, news of an embargo led crude oil prices to surge to $130 barrel, which has yet to be factored into the month-old inflation figures we received last week and this week. Energy inflation hurts consumers and all industries…except energy. The sector has been on the rise, mirroring the gains in crude prices. In the past few days however, crude oil prices have fallen significantly which helped spark a rally in equities. There are many causes for the drop in crude, principal amongst them is a COVID surge in China which has led to lockdowns. China is, by far, the largest energy consuming nation, so a pullback in demand can dramatically impact prices. Lower potential energy demand from locked-down China has led energy stocks to pullback, while fuel-dependent airlines gain altitude. This simply reminds us that, even in all the recent chaos, basic economics are still very much in command. Is it fair to say that the economic climate is fluid?
YESTERDAY’S MARKETS
Stocks leapt higher yesterday as crude oil prices eased and talks between Russia and Ukraine showed potential. The S&P500 rose by +2.14%, the Dow Jones Industrial Average climbed by +1.82%, the Nasdaq Composite Index jumped by +2.92%, the Russell 2000 Index traded higher by +1.40%, and the S&P500 ESG Index advanced by +2.20%. Bonds gained ground and 10-year Treasury Note Yields gained +1 basis point to 2.14%. Cryptos climbed by +3.93% and Bitcoin advanced by +1.85%.
NXT UP