S&P 500 surges into upper 4300s despite ongoing fighting in Ukraine, now more than 6.0% up versus weekly lows

• US equity markets built on Thursday’s stunning intra-day rebound to press higher on Friday despite intensified fighting in Ukraine.
• The West’s soft sanction response plus the US equity market’s strong track record of overcoming geopolitical uncertainty are helping.
• The S&P 500 was last up 1.9%, the Nasdaq 100 up 1.2% and Dow up 2.2%.

Despite an intensification of the fighting in Ukraine, US equity markets have built upon Thursday’s historic intra-day rebound on Friday and look on couse to end the week at highs. The S&P 500 index, which tested 4100 in premarket trade on Thursday, is now trading in the 4370 region, up more than 6.0% from earlier weekly lows and up a further 1.9% on the day on Friday. The rebound over the last two sessions means that the S&P 500 index is, for now, out of “correction” territory – i.e. it is less than 10% below its early January record highs.

Traders/market commentators have attributed a variety of factors as driving the rebound. Firstly, after the initial panic in wake of Russia’s abrupt invasion of Ukraine on Thursday, it quickly become clear to many that the EU and US would not implement sanctions on Russian energy exports amid fears of inflicting economic self-harm. As long as that remains the case, that lessens some of the stagflationary risks associated with the Russo-Ukraine war. Others have cited the fact that, in the past, major geopolitical events have not had a lasting impact on US equity valuations, meaning there has been plenty of demand to buy the dip.

US economic data on Friday was strong, with January personal income and spending metrics both exceeding expectations and durable goods orders over the same period also seeing strong growth, suggestive of economic resilience despite the high prevalence Omicron in January. Economic optimism combined with the fact that the latest Core PCE inflation report (also for January) was largely in line with expectations is likely contributing to the rally.

The latest inflation figures were not viewed as raising the risk of the 50bps Fed rate hike in March, with 25bps now the base case amid new geopolitical uncertainties. This uncertainty was referenced a few times in the Fed’s latest semi-annual Monetary Policy Report and has been mentioned a few times by policymakers over the last two days. Though Fed hawks James Bullard and Christopher Waller seem keen on a 50bps move in March, most other Fed members sounded more cautious.

Looking at the other major US indices; the Nasdaq 100 index rallied more than 1.0% and, likely to the disappointment of the bears, managed a convincing break back to the north of the 14K level. The Nasdaq is stunning more than 8.0% up from its earlier weekly lows near 13K. The Dow, meanwhile, was up roughly 2.2% and is back to probing weekly highs at the 34K level, roughly 5.0% up versus earlier weekly lows. The CBOE Volatility Index or VIX fell three points to the mid-27.00s, a more than 10 point drop from Thursday highs in the 37.00s.