St Valentine’s day massacre for stocks as markets look to possible Russian invasion

European stock markets have opened sharply lower and oil prices spiked to fresh multi-year highs amid mounting tensions between Russia and Ukraine. German chancellor Scholz flies to Kiev and Moscow to try to avert war, which the US says could start in the coming days. The FTSE 100 declined 2%, whilst shares in Frankfurt and Paris were down more than 3%. Travel & Leisure, Banks and Autos led the decliners on the Stoxx 600 with losses of around 3-4%. Brent crude futures rose above $96 to the highest in almost eight years. Banks are being hit as they are not only exposed to Russia through outstanding loans (SocGen, UniCredit etc) but also fears that Russia could be cut off from the Swift payments network. BP shares were down 3% despite the spike in oil prices due to its stake in Rosneft. Travel stocks are bearing the brunt though, with IAG and TUI down 7% or so, Wizz Air off 9% – I guess a war in Europe would put people off going on holiday a bit, but also disruption to air space. Havens are getting some bid, EURCHF weaker with the Swissy bid. Gold is a tad weaker after spiking sharply on Friday, still above $1,850. Bitcoin doing nothing at $42k…Russia has third-highest mining hash rate. Soft commodities so far not seeing any big reaction (US contracts).

Clearly concerns are mounting about Russia’s intentions over Ukraine. War seems ever closer – does the West have enough backbone to stand up to Putin? Biden’s disastrous Afghan debacle has emboldened Russia to move...but will it? The West can turn a march into Kiev into an open sore for Russia for years to come.

The other story driving the price action is the Fed. Inflation hit its highest level in 40 years last week, helping to fuel a sharp selloff in rates, although this cooled somewhat by Friday as rising tensions saw bonds catch some bid.

Nevertheless, stocks on Wall Street ended the week sharply lower amid this general backdrop of rising inflation, bond yields and geopolitical risks. The Nasdaq Composite fell 2.78%, the S&P 500 was 1.9% lower at 4,419. The Dow Jones fell over 500 points or 1.43%. For the week the Nasdaq and S&P 500 declined about 2%, whilst the Dow slipped by 1%. Tesla declined another 5%.

Is it really the situation in on the Russian border with Ukraine driving the risk-off mood? I’d say it’s got something to do with it – the market took a leg lower on Friday as the White House warned of a full-scale invasion. But that’s on the margins and headline-driven; it’s more about the Fed and the total uncertainty over what policy moves it might make in the coming weeks and months. Traders were probably selling the Russian headlines as an excuse as they didn’t want to hold risk over the weekend after a rough week for bonds. US equities were lower last week, whilst stocks in Europe firmed up – better concentration of value/cyclical over tech/growth/momentum. Europe is catching up today though to erase last week’s modest advance.

Consumer sentiment data from the US last week was very soft – the UoM headline coming in at 61.7 vs 67.2 before and below an estimate of 67.5. The consumer expectations reading declined to 57.4, levels last associated with 08-09. Inflation expectations also ticked higher.

This week will see some more colour from the Fed in the shape of the FOMC minutes from its last meeting, as well as a raft of Fed speakers. Little on the slate this morning in terms of data...eyes on Ukraine for now.

Finally, Christine Lagarde will be speaking later, perhaps giving some more steer on those hawkish remarks from the last press conference.