Major U.S. and Canadian stock indexes opened lower - although flickered out of the red for a few moments - as volatility remains high across markets.
Rising geopolitical tensions between Russia and the West are posing a double whammy for investors already worried about aggressive policy tightening by central banks to combat surging inflation.
The United States has said Russia could invade Ukraine at any time and might create a surprise pretext for an attack. The U.S., which is keeping its diplomatic channels open, also reaffirmed its pledge to defend “every inch” of NATO territory.
At 9:33 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 111.69 points, or 0.52%, at 21,437.15. The Dow Jones Industrial Average fell 43.56 points, or 0.13%, at the open to 34,694.50. The S&P 500 opened lower by 6.03 points, or 0.14%, at 4,412.61, while the Nasdaq Composite dropped 22.19 points, or 0.16%, to 13,768.97 at the opening bell.
Stock futures cut early morning losses after comments from Russia’s Foreign Minister Sergei Lavrov to Vladimir Putin that indicated Russia may continue talks with the EU and NATO over Ukraine.
The CBOE Market Volatility index, also known as Wall Street’s fear gauge, shot up to its highest level in nearly three weeks.
“We’re really dealing with the unknown and that’s what worrying markets in the short term,” said Jonathan Bell, chief investment officer, Stanhope Capital.
“Something like Ukraine may have an impact in the short term but longer term I think markets are beginning to worry about interest rates.”
Wall Street’s benchmark S&P 500 index lost 1.9% on Friday after the White House told Americans to leave Ukraine within 48 hours. Other governments including Russia pulled diplomats and their citizens out of the country.
The major indexes had a rocky start to 2022, with the tech-heavy Nasdaq down 11.8% so far this year as worsening price pressures ramped up traders’ bets for a half-point rate hike at Fed’s March meeting.
St. Louis Federal Reserve President James Bullard in an interview with CNBC this morning stuck to his call for a 100 basis point rate hike by June, saying the Fed needs to reassure to the public that it will defend its 2% inflation target.
Traders priced in a 67% chance for a 50 basis point hike in March following Bullard’s comments, from 56% previously, according to CME Group’s Fedwatch tool.
Market participants now await producer prices data for January and minutes from the U.S. central bank’s most recent monetary policy meeting later this week.
Goldman Sachs today tempered its outlook for the S&P 500 index, expecting it to stay below the 5,000 mark this year as rising inflation threatens to derail a nascent recovery in the U.S. economy. The revised forecast of 4,900 point is a near 4% cut from the brokerage’s previous estimate, but is still 11% above the S&P 500′s Friday close of 4,418.64.
Meanwhile, the fourth-quarter earnings season is in full swing, with profits for the S&P 500 and TSX Composite companies now expected to grow around 30% year-over-year.
It’s a slow morning for stock-specific news, but an analyst downgrade of Enbridge has its shares trading down more than 3%. iA Capital Markets analyst Matthew Weekes expects slower growth and other headwinds to weigh on performance of the pipeline company moving forward, and downgraded his rating to “hold” from “buy.”
In overseas markets, Frankfurt and Paris opened down more than 3%. London lost 2% and Tokyo slid 2.2%. Shanghai and Hong Kong also retreated.
Equities
Commodities
Oil steadied on Monday after earlier hitting its highest in more than seven years on fears that a possible Russian invasion of Ukraine could trigger U.S. and European sanctions that would disrupt exports from one of the world’s top producers.
U.S. crude, after trading overnight well into positive territory, has now slipped into the red.
“Market participants are concerned that a conflict between Russia and the Ukraine could disrupt supply,” said Giovanni Staunovo, commodity analyst at UBS.
He added that the oil market is very sensitive to any news of potential supply disruptions as oil inventories are low and producers’ spare capacity is expected to fall further.
“If Russia invades Ukraine, crude oil and natural gas prices can be expected to surge significantly. In this case, Brent would probably exceed $100 per barrel,” said Commerzbank analyst Carsten Fritsch.
The tensions come as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, struggle to ramp up production despite monthly pledges to increase output by 400,000 barrels per day (bpd) until March.
“Oil prices are once again coming under tremendous upward pressure as OPEC+ missed its output targets by a high 900,000 barrels in January,” said Pratibha Thaker, the Economist Intelligence Unit’s editorial director for Middle East and Africa.
The International Energy Agency’s (IEA) chief Fatih Birol on Monday urged OPEC+ to close the gap between its words and its actions.
Investors are also watching talks between the United States and Iran to revive the 2015 nuclear deal.
Iran’s foreign ministry spokesperson said on Monday that the talks have not reached a dead end, even though a senior Iranian security official said earlier that progress was becoming “more difficult.”
“A nuclear deal between the U.S. and Iran could release 1.3 million barrels of supply, but this will not be sufficient to ease the supply constraints,” said Thaker.
JP Morgan Global Equity Research said Monday that shortfalls in OPEC+ production and spare capacity concerns are likely to keep the oil market tight and prices could hit US$125 per barrel as early as the second quarter of this year.
Currencies and bonds
The U.S. dollar rose on Monday along with the yen and the Swiss franc as investors rushed into safe-haven assets amid fears that Russia is preparing to invade Ukraine. The U.S. dollar index rose 0.4% to 96.351, its highest since Feb. 1.
That has the Canadian dollar under pressure this morning, but losses to the greenback have been confined to only about a quarter of a cent.
“The CAD is softer but holding up relatively well against its commodity peers as markets shun risk. Firm energy prices provide some offset to elevated volatility and weaker stocks but the CAD is clearly at some risk of trading more in line with the weaker risk tone in the short run,” Scotabank forex strategists said in a note today.
“On the domestic front, the Ambassador Bridge linking Windsor/Detroit and a key artery for the auto sector has re-opened following last week’s protest while the domestic data calendar picks up this week with Wednesday’s release of Retail Sales and CPI data. BoC DG lane also speaks Wednesday. The market consensus is for a 0.6% gain in Jan headline inflation, keeping the y/y pace steady at 4.8%, but elevated monthly price gains or an overshoot will maintain BoC tightening bets for March, even as Ukraine tensions simmer,” Scotiabank added.
The U.S. 10-year Treasury yield is at 1.961%, staying under the 2% threshold that was penetrated last week in the wake of the U.S. inflation report.
Other corporate news
Ford Motor Co said on Monday it will continue idling some of its assembly plants in the week of Feb. 14 due to the global semiconductor shortage.
Shares of the largest publicly listed U.S. crypto exchange Coinbase slipped in premarket trading on Monday, after a surge in traffic following a Super Bowl advertisement resulted in the app crashing briefly over the weekend.
Semiconductor designer Advanced Micro Devices Inc (AMD) said on Monday it has finalized the purchase of Xilinx Inc in a record chip industry deal valued at about $50 billion.
Earnings include: Copper Mountain Mining Corp.; H&R Real Estate Investment Trust; Voyager Digital Canada Ltd.
Also see:
Monday’s analyst upgrades and downgrades
Monday’s small-cap stocks to watch
Economic news
Canadian new motor vehicle sales for December. Analyst estimate is a decline of 4.5 per cent year-over-year.
With files from Reuters