Stocks traded flat this morning as oil prices fell and yields surged. The S&P, Dow, and Nasdaq Composite initially opened higher before retracing through noon. The 10-year Treasury yield jumped to 2.11%, rising over 5.7% to hit a high that traders haven’t seen since July 2019.
With two days to go before the Fed’s first rate hike, today’s Treasury activity isn’t all that surprising. Commodity trading advisors (CTAs) are getting nervous, and rightfully so. Oil prices remain sky-high despite selling off over the last few trading sessions.
If the Fed sees this as something that will contribute to longer-term inflation struggles, Fed Chairman Jerome Powell could easily “uncork” a bigger rate hike than expected. At the moment, investors assume that the Fed will raise rates by 25 basis points (bps). Anything more than that – like a 50-bps hike – could cause a market meltdown.
Conversely, a weak hike could help gold and equities rise in tandem. Gold fell 1.4% this morning alongside other precious metals. Palladium saw the worst of metals selloff, dropping a whopping 13.3%.
For stocks, though, many analysts believe the bottom may finally be in.
“The recent moves in a range of commodity prices are extreme, and if these moves hold for a prolonged period of time, the economic damage would be significant, but we still do not believe recession needs to be the base outcome, and do not see equities falling from current levels,” explained JPMorgan strategist Mislav Matejka.
Optimism surrounding the war in Ukraine led stocks higher and commodities lower at the open today. Like last week, headlines circulated suggesting that Russia and Ukraine were on the precipice of a ceasefire.
Then, the Kremlin dashed those hopes by releasing several headlines of its own. Russian leadership said that it would “complete [its operation] on schedule” in Ukraine and that it had more than enough of the “resources needed to complete Ukraine action.”
This went against reports from the US last night that claimed Russia had reached out to China in need of military support.
We’ve mentioned before that the mainstream media did all it could to suggest that Russia was losing the war in Ukraine. The reality is that Russia’s air superiority persists, and with that, Russian forces will continue to slowly absorb Ukrainian territory. Remember that when the US invaded Iraq, it took 30 days for Baghdad to fall.
We’re currently only on day 18 of the Russian invasion of Ukraine. It’s also important to note that the Iraqi military was vastly inferior to the forces of Ukraine, which boasts the second-largest military in Europe. Only Russia had more military assets than Ukraine before the war began.
So, despite assurances from the West that Ukraine is beating back the Russian invaders, the truth is that Russia has little reason to make any concessions when negotiating with Ukraine. Things are assuredly not going as smoothly as Russia claims they are, but Ukraine’s depiction of the Russian invasion is also underselling Russia’s significant progress.
This is something investors must take into account with a rate hike approaching in two days. Bulls shouldn’t hope for a negotiated ceasefire any time soon. At least, not unless Ukraine surrenders out of the blue.
But based on Ukraine President Zelensky’s recent comments to British Parliament, that doesn’t seem very likely.
So, instead of waiting for a peace treaty-driven rally, investors should instead focus on the coming rate hike. Because if Powell over-delivers and raises rates by more than 25 bps, there could be hell to pay for anyone still long equities.
