By Geoffrey Smith
Investing.com -- Global equity markets tumble and commodity prices are squeezed higher by fears of a Russian invasion of Ukraine and its possible consequences (in the shape of Western sanctions). U.S. stocks are also set to extend their declines at the open. The Fed's Esther George repeats her calls for the central bank to sell down its bond portfolio, and uber-hawk James Bullard will speak later. Only commodities are bucking the trend, as global buyers start to look frantically for alternative suppliers of energy, agricultural and industrial products. Here's what you need to know in financial markets on Monday, 14th February.
1. Russia fears prepare a St. Valentine's Day massacre for markets
Fears that Russia will invade Ukraine continued to rattle global markets, with European stocks selling off heavily in the wake of warnings by the White House and other governments of an imminent move by Moscow.
Benchmark European stock indices lost as much as 3.2% in the first half of the trading session, against a backdrop of what appear to be last-ditch diplomatic efforts to avoid war.
German Chancellor Olaf Scholz will visit both Kyiv and Moscow Monday for talks amid hints of Ukrainian concessions, but the tone was set on Saturday after a phone call between U.S. President Joe Biden and his Russian counterpart Vladimir Putin, after which Biden again threatened “swift and severe costs” on Russia if it invades.
A White House readout after the call said that while the U.S. was eager to continue diplomatic engagement “in full coordination with our Allies and partners, we are equally prepared for other scenarios.” G7 Finance Ministers followed that up on Monday with a warning of "massive and immediate" consequences for the Russian economy.
2. George beats the drum again for QT; Bullard, Lagarde speeches eyed
A fresh barrage of central bank-speak is underway after repeated negative shocks from U.S. inflation data last week.
Kansas City Federal Reserve President Esther George repeated her view in an interview with The Wall Street Journal that the Fed should start selling bonds out of the $9 trillion portfolio it has amassed through previous bouts of ‘quantitative easing’. George argued that the Fed’s huge portfolio makes it more difficult to carry out monetary policy, and that asset sales would keep the yield curve from flattening – a nod to those afraid that the recent yield curve flattening presages a recession.
Later in the day, St. Louis Fed President James Bullard – who has already nailed his inflation hawk colors to the mast - will speak. So too will European Central Bank President Christine Lagarde, who spent most of last week trying to reverse the hawkish turn she had signalled at her latest press conference. The data calendar is, thankfully, relatively empty however.
3. Stocks set to extend post-Michigan declines; Lockheed Martin in focus
U.S. stock markets are set to open markedly lower due to war fears, which are further souring a mood that had already turned negative at the end of last week in response to the University of Michigan’s consumer sentiment index for February.
By 6:20 AM ET (1120 GMT), Dow Jones futures were down 273 points, or 0.8%, while S&P 500 futures were also down 0.8% and Nasdaq 100 futures were down 1.1%. The NASDAQ had also underperformed on Friday, as traders contemplated a simultaneous combination of weakening consumer activity and tighter monetary policy to bring down inflation.
Stocks likely to be in focus later include Lockheed Martin (NYSE:LMT), which bowed the inevitable over the weekend and dropped its deal to buy Aerojet Rocketdyne (NYSE:AJRD) due to antitrust concerns. That development is the latest sign of the Biden administration clamping down on industry concentration, after its resistance to Nvidia’s bid for ARM and multiple Canadian bids for railroad operator Kansas City Southern (NYSE:KSU).
4. Trade flows resume as U.S.-Canada bridge reopens
There was brighter news from the U.S.-Canadian border, where the Ambassador Bridge in Windsor reopened after an Ontario court allowed the forcible removal of truckers protesting against the Trudeau government’s Covid-19 policies.
With the virus’ dominant strain, Omicron, now causing a much reduced incidence of serious illness in many countries, it is getting harder to maintain the public health policies that have disrupted so much of social and economic life in the last two years.
However, the pandemic still has teeth. In Hong Kong, authorities said that the city’s hospitals had been overwhelmed with Covid-19 cases, in a reflection of how the highly-contagious Omicron is still capable of spreading like wildfire through populations with inadequate vaccination.
5. Oil, commodities squeezed higher on Russia fears
Crude oil prices hit fresh seven-year highs overnight on concerns about the availability of Russian oil exports in the event of Western sanctions in response to an invasion of Ukraine.
By 6:30 AM ET (1130 GMT), U.S. crude futures were down 0.2% on the session at $92.88 a barrel, while Brent crude was down 0.2% at $94.22 a barrel. Overnight, WTI had risen as far as $94.81 a barrel, partly due to fears that the U.S. and EU will shut Russian banks out of the SWIFT financial messaging system, the channel through which almost all international buyers execute their payments for Russian energy exports.
A lack of access to SWIFT would force international buyers to chase alternative energy supplies in the short term, at a time when the oil market already has little spare capacity to speak of. Squeezes were also visible in other products where Russia is a key exporters, such as Wheat, Nickel and Palladium.