LIVE MARKETS Round and round on the carousel of concerns

Summary Major U.S. indexes red; Nasdaq off >1%; banks slightly green

Cons disc weakest major S&P sector; utilities lead gainers

Dollar, gold slip; crude, bitcoin gain

U.S. 10-Year Treasury yield falls to ~1.85% now ~1.94%

Feb 22 – Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at [email protected]

ROUND AND ROUND ON THE CAROUSEL OF CONCERNS (1225 EST/1725 GMT)

Wall Street has been jittery as fears of a war in Europe have deepened amid escalating Russia-Ukraine tensions and threats of sanctions.

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That said, strategists at Truist Advisory Services, including Eylem Senyuz and Keith Lerner, say in their latest Global Perspective that a full-scale invasion of Ukraine can’t be ruled out, but they believe the probability of such an event has declined.

The Truist strategists add that markets tend to eventually rebound from these sorts of geopolitical events, unless the economy stumbles into a recession. They add that they see near-term U.S. recession risk as low, especially given dramatically improving COVID-19 trends.

As Truist sees it, higher energy and agricultural prices could have a greater impact on vulnerable emerging market or European economies. With this, they say that the U.S., given that its energy is mostly sourced locally, is less vulnerable to supply shocks than in the past. The strategists say this is one of the reasons Truist remains overweight domestic equities relative to international markets.

And citing the most recent American Association of Individual Investors Sentiment Survey read more , the Truist strategists believe that from a contrarian standpoint, “the ongoing carousel of concerns has resulted in very depressed investor expectations.”

They also note that similar AAII readings in the past have been followed by positive S&P 500 (.SPX) returns more than 90% of the time on a 3- to 12-month time horizon.

(Terence Gabriel)

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TUESDAY DATA: SOME SUN AMID THE CLOUDS (1205 EST/1705 GMT)

Tuesday’s U.S. economic data on manufacturing/services, housing, and confidence provided some rays of sunshine amid the geopolitical clouds hanging over the market.

Evercore/ISI is noting that the February Markit manufacturing/services PMIs came in stronger than expected. Indeed, the “flash” manufacturing PMI rose from 55.5 last month to 57.5 in February. The Reuters poll called for a reading of 56.00. The services PMI hit 56.7 vs 51.2 last month. The expectation was for 53.0. Of note, however, Evercorse/ISI adds that PMI prices components also rose.

As for housing, Case/Shiller seasonally adjusted home prices rose more than expected, up 1.5% in December vs an estimate calling for a 1.1% gain. The prior reading was a rise of 1.2%. Evercore/ISI adds that new and existing inventories are still low.

Finally, consumer confidence fell to 110.5 in February from a revised 111.1 in January. However, this was slightly better than the 110.0 expectation.

As Evercore/ISI sees it, today’s reports suggest the economy is still posting solid growth, and therefore should provide a moderate boost to Treasury yields, though they add that the geo-political news will be much more important.

In any event, they also note that “historically, (a) better than expected release in the IHS Markit PMI leads to short term gains in the equity market too by around +0.23% for every 1 point of surprise.”

(Terence Gabriel)

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TREASURY YIELD CURVE FLATTENS AS OIL PRICE JUMP DS TO INFLATION CONCERNS (1102 EST/1602 GMT)

Concerns that conflict in Ukraine will add to already high inflation has led the U.S. Treasury yield curve flatter, with the gap between two-year and 10-year yields approaching one-and-a-half year lows reached last week.

Treasuries initially benefited from safe haven buying as stocks dropped on concerns about escalating Russia-Ukraine tensions. With oil prices surging, however, the market refocused on the prospect for even more inflation. That has sent yields back higher, with shorter-dated debt leading the move.

“The flight-to-quality bid that had been associated with the tensions in Eastern Europe appear to have resolved into a flattening selloff on fortified inflation concerns,” BMO Capital Markets interest rate strategists Ian Lyngen and Benjamin Jeffery said on Tuesday in a report.

Oil rose to its highest since 2014 on Tuesday after Moscow ordered troops into two breakaway regions in eastern Ukraine, adding to supply concerns that are pushing prices towards $100 a barrel. read more

The curve between two-year and 10-year Treasury yields flattened to 41 basis points on Tuesday, from 46 basis points on Friday. It reached 38 basis points last Monday, which was the smallest yield gap since July 2020.

The Treasury yield curve has been flattening as investors adjust for the likelihood that the Federal Reserve will aggressively raise rates to tackle high inflation, beginning in March. The prospect of new price pressures could make the Fed even more hawkish.

“We don’t think Russia’s moves in the Ukraine will have a material impact on the FOMC’s liftoff timing nor do they make a 50 bp hike any more likely,” BMO said. “That said, the weakness in the front-end of the curve implies that, if anything, the spike in energy prices has increased the odds that the Fed will move further and faster than previously assumed.”

Fed funds futures trading is now pricing in a 35% chance that the Fed hikes by 50 basis points in March, up from 22% on Friday. A hike of at least 25 basis points is fully priced in. FEDWATCHIRPR

Meanwhile, analysts at JPMorgan warned that aggressive monetary tightening remains the key risk for stocks, and that overly restrictive monetary policy could result in a policy error, particularly if the business cycle continues to deteriorate.

That said, “the Russia/Ukraine crisis could force a reassessment of the Fed tightening path resulting in central banks turning less hawkish, while policymakers may consider additional fiscal stimulus (e.g. US gas tax reduction),” JPMorgan analysts including Dubravko Lakos-Bujas said in a note sent on Tuesday.

(Karen Brettell)

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U.S. STOCKS GYRATE, BUT UP FROM OVERNIGHT LOWS (1000 EST/1500 GMT)

Major U.S. stock indexes are choppy on Tuesday, but up from lows reached overnight in futures as fears over a war in Europe deepened amid escalating Russia-Ukraine tensions and oil prices hit their highest levels since 2014.

Russian President Vladimir Putin recognized two breakaway regions in eastern Ukraine and ordered troops to those regions, inviting threats of fresh Western sanctions.

Germany on Tuesday halted the Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany. read more

Major S&P 500 (.SPX) sectors are in the green despite the weakness in major indexes, with healthcare (.SPXHC) and energy (.SPNY) leading the gainers on the day.

Consumer discretionary (.SPLRCD) and consumer staples (.SPLRCS) are the worst performers.

Here is your early trade snapshot:

Monitor

(Karen Brettell)

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U.S. STOCK FUTURES SEE WILD OVERNIGHT ACTION (0900 EST/1400 GMT)

Fears of escalating tensions in Ukraine continue to grip markets. read more

At one point in Tuesday’s early hours, coupled with the long holiday weekend, CME e-mini Nasdaq 100 futures were down as much as 3% from Friday’s close. read more

With this, the futures hit their lowest level since early June of last year, and were down 18.1% from their Nov.-22 record intraday high:

NQcv10222022

However, the futures have since snapped back, and are now off less than 0.5% from Friday’s close. read more

Additionally on the plus side, daily momentum oscillators are showing potential for a bullish convergence. Although, the futures are on pace for their lowest close in eight months, the RSI is well above its late-January trough. Of note, the RSI demonstrated a convergence pattern into the futures’ March 2020 bottom.

That said, since the futures broke sharply lower in early January, the descending 30-day moving average has capped strength. This shorter-term moving average, is now around 14,750, and continues to press down on NQcv1 price action. read more

Meanwhile, e-mini S&P 500 and Dow have also recovered off their overnight lows and now posting just modest losses. E-mini Russell 2000 futures have turned slightly positive.

(Terence Gabriel)

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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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