Markets reel as Russian sanctions escalate

Traders work on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., March 7, 2022. REUTERS/Andrew Kelly

March 8 (Reuters) – Falling stocks, soaring commodity prices and tighter global financial conditions in the wake of Russia’s invasion of Ukraine cloud the outlook for markets already troubled by the prospect of a hawkish Federal Reserve.

Dramatic moves are everywhere you look, from a bear market in the Nasdaq Composite Index and wild rallies in oil and other commodities to surges in popular safe-haven assets such as gold and the US dollar.

Above all that, the Fed is expected to raise rates at its monetary policy meeting next week for the first time in more than three years. Some investors now fear that the US central bank will have to keep raising rates to contain rising inflation despite an expected hit to growth from geopolitical instability, risking a recession.

“Traders aren’t used to this kind of volatility in the markets,” said Michael O’Rourke of Jones Trading. “Everyone is trying to figure out what the next threat is and where the next distortion is.”

RAW MATERIALS RALLY

Sanctions on the Russian commodity export giant by the United States and its allies have fueled a rise in prices for oil, metals, wheat and other commodities, a move investors fear exacerbate already high inflation while weighing on global growth – a condition known as stagflation.

Brent crude is up more than 25% since early March while nickel prices more than doubled on Tuesday, forcing the London Metal Exchange to suspend trading in the metal. Read more

“For the US economy, we are now witnessing stagflation, with consistently higher inflation and lower economic growth than was expected before the (Ukraine) war. A recession can no longer be ruled out,” wrote strategist Ed Yardeni of Yardeni Research in a recent note to clients.

THE EMERGENCE OF BEARS

The Nasdaq (.IXIC) slipped 3.6% on Monday, taking it more than 20% below its recent high, confirming that the index is in a bear market, by a common definition. The German DAX (.GDAX) is also in bearish territory, while the benchmark S&P 500, down nearly 12% this year, recently confirmed a correction.

SQUEAK PLUMBING

Financial indicators show growing signs of market stress. One of them is the so-called FRA-OIS spread, which measures the difference between the US three-month forward rate agreement and the overnight indexed swap rate. It was recently at its highest level since May 2020. read more

A higher spread reflects rising interbank lending risk or banks hoarding US dollars, meaning it is widely seen as an indicator of banking sector risk.

The dollar rush has been a major contributor to the greenback’s advance against the euro over the past two weeks, according to Huw Roberts, head of analysis at Quant Insight in New York.

More generally, global financial conditions – the umbrella term for how parameters such as exchange rates, equity moves and borrowing costs affect the availability of finance in the economy – are at their highest. for about two years. Read more

GYRATIONS

Volatility in stocks, currencies and rates is at multi-year highs as investors calibrate their portfolios to rising commodity prices and a potentially protracted conflict in Eastern Europe.

The Cboe, known as Wall Street’s fear gauge, was at 33 recently and has jumped about 16 points this year.

Sharp rises and falls in Treasury yields – fueled by bets on the Fed’s aggressiveness in raising rates in 2022 as well as a flight to safety in US government bonds, carried the ICE index BoFAML MOVE (.MOVE) at its highest level since March 2020.

Meanwhile, currency swings and a rally in the US dollar took Deutsche Bank’s Currency Volatility Index (.DBCVIX) to a nearly two-year high.

FLIGHT TO SAFETY

Unsurprisingly, investors took shelter in gold, the dollar, the Swiss franc and other so-called safe havens, driving their prices to multi-month highs. Gold prices have risen more than 10% this year.

(This story has been reclassified to correct the March 8 date.)

Reporting by Saqib Iqbal Ahmed and Ira Iosebashvili Editing by Mark Heinrich

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