Morning Roundup

By Mark Masterson on February 23, 2022

Good morning,

Below are the news items moving markets today

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Executive Summary:

Looks like a bounce day after 4-5 consecutive down days for markets.

More on that below in the charts.

Markets are trying to guess how the Fed will move in March.  I would expect a 25 bp move – but that may depend on the next inflation reading.

Market prices of 50 bp Fed March rate hike volatile this week:

• Market expectations for a 50 bp rate hike in March have been very volatile this week.
• Bloomberg noted market-priced odds of 50 bp March hike rose to 40% on Tuesday after falling as low as 13% on Monday, while the CME FedWatch tool today shows a ~32% chance.
• Market probabilities have been whipsawed by a number of competing factors. Some analysts have noted elevated Russia and Ukraine tensions providing offramp for Fed to hike 25 bp instead of 50 bp in March. However, analysts also noted 2Y yields, which reflect short-term Fed expectations, are also sensitive to global energy prices, a key driver to short-term inflation expectations.
• Crude remains near highest levels since 2014, rising yesterday over fears of Russia supply disruptions. However, Biden’s announcement on sanctions did not include energy, while Washington Post cited analysts who see low likelihood of serious supply disruptions.
• Fed’s March meeting also comes after the February CPI report (10-Mar), adding to policy path uncertainty. Recall 50 bp hike odds rose to above 90% following hotter than expected January CPI print.

Pretty modest response by team Biden to Putin’s incursion into Ukraine…..

Biden threatens steeper sanctions on Russia, says US has no intention of fighting:

• This afternoon, President Biden reiterated Russia’s recognition of and invasion into the breakaway Donetsk and Luhansk regions inside Ukraine was an act of aggression for which Russia alone bears responsibility.
• Also cautioned Russia’s military deployments and legislative steps set the stage for further action.
• Stressed the US has no intention of fighting Russia, but also announced additional deployments of NATO troops in Europe to reinforce the Baltics.
• Said the West remains open to diplomacy, but did not clarify whether Secretary of State Blinken and Russian Foreign Minister Lavrov will still meet Thursday (note a scheduled French meeting with Lavrov was canceled today).
• Added he hopes to target sanctions to impact Russia while sparing US drivers at the pump. Biden’s statements, along with those today by European allies, suggest the West still hopes to move incrementally with sanctions and reserve extreme steps as a possible check against wider Russian military action.
• Biden unveils sanctions on Russian sovereign debt sold abroad and country’s elites (Bloomberg)
• Putin says Russia always open to diplomacy but will put national security interests first and continue strengthen its military (Reuters)
• Proposed Blinken-Lavrov meeting, Biden-Putin summit off the table (Washington Post)
• Experts expect blowback from Russian sanctions, potentially in terms of cyberattacks (Axios, WSJ)

Some good news on the covid front with cases falling dramatically…..

Covid cases have plummeted 90% from pandemic peak:

• While largely overshadowed by concerns about the Fed’s hawkish policy shift and geopolitical tensions, improved Covid trends remain a key component of the bullish narrative for US equities, particularly value and cyclical plays.
• Companies in epicenter industries (airlines, restaurants, retail, OTAs) have highlighted better trends in more recent weeks following some slowing in December and January, along with expectations for a fairly rapid demand recovery.
• CNBC noted new cases in the US have plummeted 90% from a pandemic record set just five weeks ago with the spread of Omicron. Article pointed out the decline is widespread across the country, with average daily cases down by at least 40% in all regions over the past two weeks. Added that hospitalizations have also fallen sharply and while still elevated, the Covid death toll is showing signs of easing.

More on the markets below……

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Articles of Interest:

• Oil:
  • Analysts downplay potential for serious disruptions to energy supplies from escalation of Ukraine tensions (Washington Post)
• Markets:
  • Investors have been steadily boosting bets against equities, short interest on SPY has doubled since start of the year (Bloomberg)
  • Technical backdrop for US equities is deteriorating (Bloomberg)
  • Strategists continue to stick to view that markets can weather geopolitical crisis (Bloomberg)
  • Volume in US over-the-counter equity trades down nearly 75% from peak as investors dial back speculative bets and regulators crack down (FT)

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Charts of the day:

Markets may be poised for a bounce as negative sentiment remains quite elevated……

You can see below that we are at/nearing levels where at least short term bottoms can form…..

In addition – from a technical perspective – this is the most likely place for a bounce.

The market fell 10% again from the highs.  That enters “correction” territory – and buyers normally jump in here hoping for a bottom.

You can see below that it is also testing support again – possibly forming a double bottom.  Again – technical investors will jump in here and hope it holds.  If it bounces, then rolls over again to break that red line – selling will intensify as all those technical buyers have stops right below that red line.

What needs to be watched is the bigger picture of the Fed tightening cycle.  The yield curve is moving lower, and should it move below that black line and “invert” – it will greatly raise the chances of a recession.

You can see the past times it inverted, a recession soon followed. (gray vertical shaded areas)

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Quote of the day

“Growth on the inside fuels growth on the outside, not the other way around.” – John C. Maxwell