S&P 500 slides back to 4300 as investors fret about economic impact of harsh Western sanctions on Russia

US equities were sharply lower on Tuesday as investors fretted about the global economic impact of the West’s harsh sanctions against Russia, and as the country intensified its bombardment of Ukrainian cities. Commodity prices, from crude oil to gas to wheat, surged on Tuesday, igniting fears about longer-lasting inflationary pressures in the US and Europe and sparking talk of stagflation. Amid the growing wall of worries faced by investors, the S&P 500 fell back towards the 4300 level, a drop of more than 1.5% on the day.

Similarly, the Nasdaq 100 index fell back to the 14K area to post a drop of more than about 1.6%, despite a sharp drop in yields as investors sought safety in US government debt markets and revised lower US growth/Fed tightening expectations. The drop in yields weighed heavily on the Dow, which is more heavily weighted to cyclical/more economically sensitive stocks (which can have a positive correlation yields). The index was last also down more than 1.7%, in tandem with its peers.

Rhetoric from regional Fed Presidents including Loretta Mester and Raphael Bostic on Tuesday highlighted that the Fed is well aware of upside inflation risks/downside growth risks as a result of the Russo-Ukraine war. But the policymakers unsurprisingly signalled that the Fed’s path remains towards the removal of policy support. Meanwhile, US ISM Manufacturing PMI survey data for February was out on Tuesday and showed a stronger than expected pick up in activity on the month as Covid-19 infection rates subsided.

One investment strategist outlined a positive equity market outlook. “Given the fact that the US economy is accelerating, the uncertainty will be relatively short-lived and it wouldn't be a surprise if the market found its footing, sometime over the next couple of weeks when clarity is restored”.