Stocks rallied hard this morning following new developments in Ukraine. The Dow, S&P, and Nasdaq Composite all surged through noon as Ukrainian leadership continued to make appeals for peace. Ihor Zhovka, Ukraine President Zelensky’s deputy chief of staff, said that Ukraine was ready for a “diplomatic solution.”
Zhovka then explained that Ukraine was open to discussing NATO neutrality but would require a “security guarantee” from the country’s neighbors to consider it.
As has been the case since the Soviet Union fell, Ukraine once again finds itself caught between two great powers. This time around, however, Russia has clawed back the predominantly pro-Russia regions of Luhansk and Donetsk.
Russia wants to break these territories off of Ukraine and have them recognized as independent states. But Zhovka said, moments after his initial (bullish) remarks, that Ukraine wouldn’t trade a “single inch” of its territories. Then, he dashed hopes of peace further by adding that Ukraine wants a response from the EU on the condition of its application.
So, even though Ukraine is no longer dead set on joining NATO, it still wants into the EU, which would virtually provide the same benefits and protection as NATO membership.
And, to Russia, that would also present the same dangers as a NATO-controlled Ukraine.
This made Zhovka’s earlier comments far less of a bullish impulse. Nonetheless, traders took them as a sign that conditions are improving in Ukraine. Commodities plunged, giving stocks some breathing room as bulls took control.
West Texas Intermediate crude, which serves as the US oil benchmark, fell 4% to roughly $118 per barrel. Brent crude – the international benchmark – dropped 3.5% to $123.
“The equity market continues to take its cues from changes in commodity prices, namely oil,” said Oxford Economics’ Kathy Bostjancic.
“Trading will continue to be volatile and rally when prices retreat, but overall, the prospect of oil and non-energy prices remaining very high casts a cloud overall the outlook for economic activity and the equity market.”
One week from now, the Fed will wrap up its March FOMC meeting on the 16th. Fed Chairman Jerome Powell is expected to announce a rate hike to the tune of 25 bps.
With oil prices skyrocketing, though, Powell may unveil a bigger rate increase in his post-FOMC press conference. Gas just hit a record high in the US, which will increase the costs of virtually all goods, thus making the already bad inflation situation worse.
“You can’t have the rise at the fuel pumps not hit the economic pockets of everyday Americans, because it’s going to make everything go up in costs,” said Victoria Greene, G-Squared Private Wealth founding partner.
“Anything that rides on four wheels or six wheels, including all your shipping — it’s going to make all your costs rise. We’re already in an inflationary environment […] it really is going to be something that we have to watch.”
Powell may claim that high commodity prices are “transitory” (much like he did when talking about inflation last year) due to temporary sanctions against Russia. But as Greene noted this morning, longer-term issues could persist even if the sanctions are lifted soon.
“I don’t think that sanctions are going to go away,” she said.
“The world is […] angry at this situation. So, let’s say miraculously we get a ceasefire tomorrow, I think the general shrinkage and the issues with supply chains are going to be a sticky situation for the rest of the year.”
That’s about as bad as it gets for Powell. Historic gas prices are pushing inflation higher while an impending economic slowdown approaches. He can raise rates substantially in an attempt to meaningfully bring down inflation. But if Powell does that, the US economy will be swiftly dragged into a recession.
The other (and more likely choice) involves a weak rate hike that allows inflation to continue climbing. This would please bulls, of course, and stocks would undoubtedly rally in response. But the market would also begin its long, slow “death” as inflation progressively robs investors of real returns over time. Nominally, the gains would still look good.
Anyone paying attention, however, would know that no real money is being made. The moral of the story is that peace in Ukraine, while certainly good for the Ukrainian people, won’t be able to solve the market’s bigger problems.
And that, heading into the March 16th rate hike, could keep stocks chopping sideways over the next week.
