What Does Russia’s Threat Really Mean for Markets?

Russian officials maintain they have no plans to invade and say they are seeking a diplomatic way forward. Western officials don’t fully believe Russia’s claims, pointing to the continued military buildup along Ukraine’s borders. Both sides accuse the other of waging propaganda campaigns and Ukraine itself has made conflicting claims about how high the threat level really is.

Many Russian experts say that Russia’s economy won’t support an invasion of Ukraine and believe that Russian President Vladimir Putin is just trying to squeeze concessions out of the West.

Still, just the possibility of Russia’s oil supplies being interrupted has sent crude oil prices over +$95 per barrel with some insiders warning that an escalation in the standoff could send futures prices soaring to +$150.

Keep in mind, many oil insiders believe crude prices could top $100 per barrel in the near-term even without an armed conflict in Ukraine due to a growing supply deficit. Higher oil prices complicate the inflation fight that the Federal Reserve is now trying to battle.

Federal Reserve policy

While higher oil prices exacerbate inflation, there is nothing that central bank policy can do to impact oil markets. So we have a situation of higher oil prices adding to already high inflation at the same time that the Federal Reserve is preparing to raise interest rates.

Most economists fear this is a recipe for slower economic growth, possibly even recession.

When the Fed said inflation was “transitory” back in the summer of 2020 I doubt they were forecasting “delta” the major second wave of the virus and or forecasting the third “omicron” wave of the virus. I also doubt they thought about Russia and China aggressively flexing their muscles or perhaps even working to pour gas on the inflationary fires that are currently burning.

Nonetheless, here we are with investors talking about perhaps the start of an extended bear market in stocks, i.e. in 2000 the S&P 500 was down -9%, in 2001 it was down by another -13%, and ended in 2002 by tumbling another -23%. I’m certainly not saying we are going to repeat the dot.com bubble bursting but there is a chance we could continue to make lower highs and lower lows until the market is more certain about Fed policy and their rate of change and more certain about some of the geopolitical jockeying that could keep inflation hotter than some bulls have been forecasting.

St. Louis Fed President James Bullard told CNBC yesterday that the Fed needs to accelerate its pace of rate increases and repeated that he would like the Fed to raise its policy rate by 100 basis points by July. Bullard said previously that he supports starting with a 50-basis point rate hike in March and would like to see the central bank begin reducing its balance sheet by the end of Q2.

It’s worth mentioning that the “minutes” for the Fed’s January meeting will be released tomorrow which is guaranteed to be the most hawkish narrative to come out of the central bank since the start of the pandemic. It’s not likely to provide much in the way of clues as to what the Fed’s next move might be but it could provide some indication as to how many members are firmly planted in the aggressive policy tightening camp.

Data to watch

Today, bulls are nervous that the Producer Price Index could further stoke inflation fears if the gauge comes in higher than the +9.2% year-over-year rate that Wall Street is expecting. The December read did show signs of price pressures starting to ease but most of that was credited to lower energy prices in early December, which as we know have only marched higher since. Also due out today is Empire State Manufacturing.

Earnings today include Airbnb, Glencore, Invitation Home, Marriott International, Novozymes, Restaurant Brands, Roblox, ViacomCBS, and Zoetis. For full disclosure I still own shares and continue to be a long-term investor in Airbnb, Roblox, and Zoetis.

For a look at all of today’s economic events, check out our economic calendar.

Will Earnings Season Bring Volatility To The Stock Market?

The Commerce Department last week reported that the U.S. economy grew at a +6.4% annual rate in the first quarter, slightly below estimates but still strong. If it would have come in real hot and much higher bears would have pointed to fanning the inflation flames even further.

This mindset of “bad-news-could-be-good-news” is helping to keep the stock market at or near all-time highs. If economic data somewhat disappoints it means the Fed stay dovish and accommodative for longer.

Fundamental analysis

That might be important to keep in mind as April data starting this week is expected to be extremely good. The April Employment Report is due next Friday and with upper-end of Wall Street estimates look for upwards of +1 million new jobs being added. Other key April data next week includes the ISM Manufacturing Index on Monday, and the ISM Non-Manufacturing Index on Wednesday.

employment

If the data comes in better than expected the bears will win the nearby battle and have the upper hand when talking higher inflation and the Fed perhaps tightening sooner than anticipated. So this week could be a bit tricky whereas “disappointing-data” could actually be digested as a win for the bulls and “strong data” a win for the bears.

The earnings calendar is packed again next week with big names including Activision Blizzard, Adidas, AllState, Cerner, Cigna, CVS, Dominion Energy, Enbridge, Etsy, Hilton Worldwide, Moderna, Monster Beverage, Nintendo, PayPal, Peloton, Pfizer, Rocket Companies, Square, TMobile, Wayfair, and Zoetis.

COVID-19

Checking in on U.S. progress against Covid-19, the number of adults that have received at least one dose is around 60%-65%, depending on the source. Global cases continue to rise led by India, where new infections have been hitting new record highs every day for weeks now. The country reported a staggering 380k new infections and 3,645 new deaths on Thursday while less than 10% of the population has been vaccinated.

Bottom line, the global restart will not be synchronized like many bulls had hoped would be the case and global growth may continue to struggle. At the moment the U.S. market doesn’t seem to care. It will be interesting to see if increasing inflation and continued global headwinds will eventually come home to roost.

SP500 technical analysis

SP500 earnings season

Earnings season can bring volatility to the stock market. At the beginning of May, cycles turn to the downside. Note, this is only a timing tool and it never shows the amplitude or strength of the move. When cycles are topping, it means we can expect a move down or choppy trading. This is it.

But relying on cycles only is not a good idea. Insider Accumulation Index shows bearish divergence on a daily chart. At the same time, Advanced Decline Line is still strong. The key resistance is around 4250 at the moment. I believe earning season can bring a profit booking to the stock market. If that happens, watch 4000 – 39500. It was a massive resistance and now it might turn into support. Intermarket Forecast is neutral. But if it turns to the downside, we will finally see a pullback in SP500.

For a look at all of today’s economic events, check out our economic calendar.