Financial markets exhibited a significant increase in volatility on Monday. Certain commodities, such as nickel, crude oil, and natural gas ran much higher at times. Nickel is still going as I write.
Oil jumped early on Monday in response to the Biden administration's signaling an openness to freezing imports from Russia. The idea was echoed by U.K. Prime Minister Boris Johnson. The European Union is expected to outline a plan today (Tuesday) that would limit Russian gas imports by as much as two-thirds over a year's time.
The scuttlebutt on Wall Street turned to talk of recession. Global recession. The idea is not so crazy with war raging in Eastern Europe, Beijing setting its lowest GDP growth target in 30 years, and the Atlanta Fed's GDPNow model tracking the U.S. economy at growth of 0.0% (q/q SAAR) for the current quarter.
Markets reacted in almost pure risk-off fashion. Though oil prices came in throughout the day -- WTI closed up just a few percentage points (near $119 after trading as high as $130) after German Chancellor Olaf Scholz showed overt reluctance to restrict imports of commodities essential to running Europe's economy -- much damage was done. WTI still closed at its highest level in almost 14 years.
Run for the Hills
Contagion spread across the financial landscape. The U.S. Treasury yield curve continued to flatten, as illustrated here by the 10-Year/2-Year spread:
Equities were hit severely as well. The Nasdaq 100 and Nasdaq Composite gave up 3.75% and 3.62%, respectively. This left both of these large-cap, tech-focused indexes more than 20% off of their November 2021 highs. placing them both in what is considered to be "bear market" territory. The small-cap Russell 2000 "only" surrendered 2.45%, and also spent the night back in bear market territory. The Dow Transports (-3.89%), S&P MidCap 400 (-3.76%), and S&P 500 (-2.95%) all stopped short of meeting the bear, and reside firmly in "correction" land for now.
Nine of the 11 S&P sector SPDR ETFs closed in the red, all nine giving up at least 1.74% for the session, with six of the 11 losing a least 2.68% over six and a half hours of financial torture. While Energy ( ( XLE) ), as usual, was the equity market's top performer, with Utilities ( ( XLU) ) close behind as dividend seekers did some seeking, Consumer Discretionaries ( ( XLY) ) took a 4.9% beating as Dow Jones Industry specific indexes representing the travel, tourism, hotel, apparel, recreational services, and gambling industries all lost at least 7% on Monday.
Losers beat winners at the NYSE by almost 4 to 1 and at the Nasdaq by nearly 3 to 1. Advancing volume took a 27.5% share of composite NYSE-listed trading and 33.8% of composite Nasdaq-listed trading, while trading volume in aggregate increased significantly for NYSE-listed securities, for Nasdaq-listed securities, for S&P 500 subordinate names, and for Nasdaq Composite subordinate names. In short, professionally managed capital not only participated heavily on Monday, the pros showed some aggregate fear.
Early On
It appeared early on Monday that maybe there was some hope for the ongoing peace negotiations between Ukraine and Russia. The Kremlin, at least publicly, had backed off of demands for complete Ukrainian capitulation, demanding only a Ukrainian cease-fire, Ukraine making a constitutional change eliminating the possibility of the besieged nation ever entertaining the idea of membership in either NATO, or the EU, recognition of the Crimean peninsula as part of Russia, and recognition of the separatist regions of Donetsk and Lugansk as independent.
While these terms would obviously not be acceptable to Ukraine, given they are the invaded party, have suffered a long list of atrocities against the civilian populations at the hands of the Russian army, and have largely outfought the Russian army everywhere there has been a standup fight, all as the Russian army struggles to fuel its vehicles and feed its troops as rumors of morale problems crop up in the ranks. This could permit the optimist to wonder if the Kremlin is now trying to find the most dignified way possible out of this mess of its own creation.
That optimism was put to rest as Russia threatened to cut natural gas flows to Europe via the Nord Stream 1 pipeline in response to global sanctions that have almost isolated Russia financially from the rest of the planet. We say almost, because Chinese Foreign Minister Wang Yi made plain that making war on defenseless civilians would be no reason for Beijing to throw away a friendship and developmental partnership with Russia that could be beneficial at some point. As Wang Yi said aloud: That friendship is "rock solid." The U.S. was also warned against forming a NATO-like or for readers of a certain age, a SEATO-like alliance in the Pacific.
In Case You Were Wondering...
...Why certain metals were not running with others on Monday, there's a reason. Mining.com reports that Chile's constituent assembly, which is writing a new constitution for that country, approved an early-stage proposal that opens the door to at some point, nationalizing Chile's copper and lithium mines. This proposal targeting large-scale mining of copper, lithium, and gold remains at the committee level, where it easily passed, and will not be voted upon by the full assembly until later this year. Chile is the planet's top producer of copper, and also is a major player in lithium where one would think demand will probably only rise from here.
For the regular session, Freeport-McMoRan ( FCX) gave up 5.9%, while Southern Copper ( SCCO) surrendered 3.0%. Lithium names that were slapped around included Albemarle ( ALB) , Lithium Americas ( LAC) and Livent ( LTHM) .
Now, That's Interesting
Night owls probably noticed that European equities were stronger on Tuesday than one might have thought, that somewhere between 2 a.m. and 3 a.m. on the U.S. East Coast, U.S. equity index futures that had been trending lower, suddenly perked up, as the U.S. Treasury yield curve suddenly opened up and yawned wide.
It appears that the European Union is working toward unveiling a plan, perhaps later this week, as leadership is set to hold an emergency summit at Versailles this Thursday and Friday, that could result in a jointly issued bond sale of potentially massive scale that would address the now glaring need to upgrade European spending on energy and defense.
There are no details that have been made public beyond what I just told you concerning specific size or specific national focus. That said, the plan will likely involve the European Commission, which would issue the bonds and then pass out the proceeds to member states in the form of concessionary loans in order to finance these needs.
How much of this idea had already been priced into the large defense contractors we'll soon find out. Lockheed Martin ( LMT) has knocked down my target price (s) twice in under a week's time, while Northrop Grumman ( NOC) actually grazed my $490 target on Monday prior to giving back the majority of the day's move.
The fact is that exposure to big defense and big oil (and small to mid-sized U.S.-focused oil/natural gas producers at least until Monday) has been a portfolio savior in these times. I can't say that I am kicking a whole lot of tail this year. I can say, without bragging because there is no reason to brag, that my main investment portfolio has weathered this storm remarkably well. Much, much better than the marketplace.
Did You Know?
Coinbase ( COIN) on Monday said it has blocked 25,000 crypto wallets related to Russian individuals or entities that the firm believes to be engaging in illicit activity. This represents 0.2% of Coinbase's 11.4M monthly transacting users.
Almost Lost
Almost forgotten amid the sea of geopolitical and financial headlines is the fact that Tuesday (today) brings Apple's ( AAPL) first product launch event of 2022. Just days after Apple halted all sales inside the Russian Federation and removed Russian news apps from its App Store, Apple is expected (by Wall Street) to launch a new iPhone SE with a new proprietary A15 Bionic chip and 5G capability starting at possibly $399. The company may also launch a new IPad Air 5 that will include that same new proprietary chip, and one new MacBook release.
There could be more, one never knows, maybe something on the services side? That said, there is no way to predict how the stock will act today. Me? I'm just staying invested in this one. It is a tradeable name.
That said, this is also a "hold-able" name, in my opinion. Readers will see that with much of the tech space in freefall AAPL appears to have retreated in orderly fashion and may have built what looks like a falling wedge -- which is a bullish signaling pattern.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Feb): Expecting 97.2, Last 97.1.
08:30 - Balance of Trade (Jan): Last $-80.7B.
08:55 - Redbook (Weekly): Last 13.4% y/y.
10:00 - Wholesale Inventories (Jan): Flashed 0.8% m/m.
16:30 - API Oil Inventories (Weekly): Last -6.1M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
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