Russian offensive sees a flight to safety

Overnight Headlines

*Russia attacks targets across Ukraine after Putin orders strikes

*Risk-off sees stocks tumble, safe havens bid as VIX jumps above 30

*Oil surges above $100 for the first time since 2014, US eyes strategic reserves

*Gold surges +1.5% above $1940 while commodities shoot higher

US equity futures have fallen 2-3% overnight as Russian troops go deeper into Ukraine. Both the Dow and the Nasdaq had dropped for a fifth day on Wednesday. The Nasdaq and small cap Russell 2000 will be in a bear market – down 20% from its highs. Most stock markets are in correction mode, down over 10% from their peaks. Cyclicals have been the worst hit, especially tech and consumer discretionary. Energy and defensives are faring the best. Asian markets are down 2-3% with European futures similar.

USD has jumped this morning as it assumes its safe haven status. DXY is trading above 96.50 and has broken out of its recent range. JPY is the leading major, with CHF also bid. EUR/USD has fallen over 0.5%, with a low so far at 1.1208. EUR/CHF, a European risk sentiment gauge set a new seven year low, sub 1.03. AUD and NZD have (finally) been sold as risk aversion takes hold.

Market Thoughts – Uncertainty and risk-off

Market reaction to the overnight news appears pretty much in line with expectations. Equity futures are sinking, and US Treasury bond yields are falling. Oil and gold have jumped while gas prices have opened up over 20% higher. Further price rises reinforce inflationary pressures and will weigh on global growth. Russian assets have plunged with the Moex down another 11% and the ruble is off some 7%.

Risk aversion is naturally hitting European assets the most. Markets are also seeing a negative effect from a further rise on energy prices with commodities generally ramping higher. Aluminium has hit a record high, wheat a nine-year top. Ukraine is a key exporter of corn and wheat.

We had written previously how traders hadn’t priced in a full-scale invasion. Next steps will be how far troops go, and the West’s reaction in terms of sanctions. Risk aversion is certainly the name of the game at present. But the market impact of geopolitical events does tend to fade after a relatively short period of time. It’s just tough to go against it for now.

Chart of the Day – Nasdaq veering into bear market mode

This week has seen an extension of recent trends with growth, tech and bubble stocks leading the declines. Whipsaw markets saw the Nasdaq up 1.5% pre-open yesterday before selling off sharply. Nasdaq futures are now down over 21% from their November record high at 16767.

The weekly futures chart shows consolidation around the highs coming into the new year around 16000. Rising yields and expectations for Fed rate hikes saw a major plunge in mid-January. Prices held up around the 50-week SMA at 14768 before the last week’s selling. This week’s down move has hit the 100-week SMA at 13020. Next support is 12642 and 12465. Resistance is 13706 and a more substantial barrier at 14367.


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