Stocks Rally After Decent Data With Focus On Ukraine

March 24, 2022

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By Anna Peel. Originally published at ValueWalk.

OANDA – Stocks rally after decent data with focus on Ukraine, Oil declines, Gold rallies as sanctions hit Russian bullion holders, Bitcoin benefits from risk-on rally

US stocks rose as investors assess the impact of the latest round of sanctions against Russia, mostly impressive US data, and as oil prices edge lower. Wall Street knows that the US economy is still looking pretty good but they are trying to figure out how aggressive the Fed will be with tightening, how high oil prices will get, and will the war in Ukraine be over in a few months time. The S&P 500 is making another run for the 4,500 level, but the key one to watch is 4,541 which should provide significant resistance. Too much geopolitical uncertainty and likely commodity price stress will cap this current stock market advance.

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Sanctions

The G7 reached an agreement on coordinated sanctions against Russia that should have a crippling effect on their economy. With over 400 individuals and entities now subject to sanctions, President Putin’s support for the war back home should be waning. The key hit to the Russian economy would be an embargo on coal, oil, and gas, but that still seems like a card that won’t be played until Europe has made better protections to deal with that shortfall in energy.

The next phase of the war is circled with uncertainty as the Russians can emphasize cyber, or even worse chemical and nuclear attacks. The Russian economy is heading towards a bad recession and that could prompt action that does not make this a long war.

US data

The labor market is still showing no signs of weakening after initial jobless claims fell to a 53-year low. New applications for jobless benefits fell to 187,000, much better than the consensus estimate of 210,000 and upwardly revised prior reading of 215,000. US durable goods order dropped more than expected as supply chain issues returned and as passenger planes and autos posted a hefty decline. Traders were somewhat expecting weakness for orders at factories given it has been all uphill since last year. The core capital goods order reading fell 0.3%, which isn’t so bad given how well it has performed. Business activity may soften a little bit more, but not many are expecting complete deterioration in the space.

Oil

Crude prices are declining as energy traders expect that after all the EU leader, NATO, and G7 meetings, Russian energy will not be sanctioned anytime soon. Mixed European manufacturing data and the snapping of robust factory activity in the US did not do much for changing the opinion of how the crude demand outlook will be in the next few months.

The focus for oil remains with the war in Ukraine. Some Russian military advances have ground to a halt, which is complicating Putin’s goal to secure the South, which includes the land corridor between Crimea and the Russian-backed separatists in Donetsk and Luhansk.

NATO members are not throwin’ away a shot at ratcheting the pressure against Russia right now. They will take time before they have to resort to an oil embargo on Russia.

Today’s weakness in oil prices should be limited given the geopolitical risk that still remains on the table and the fact that capital discipline by non-OPEC producers suggest it will take time to see other countries ramp up production.

Gold

Last week, a rallying stock market and surging bond yields was bad news for gold. That is not the case anymore. Even with initial jobless claims falling to the lowest levels since 1969, gold prices are surging as investors await the impact of the latest round of US sanctions that now prevent Russian sanctioned entities from any gold transactions. If you are on that sanction list, it looks like you won’t be able to do any selling with your gold holdings.

A big part of today’s gold rally coincided with a wrath of Fed speak that suggests a much more aggressive pace of tightening policy, which will ultimately drive growth concerns by the time we get to the summer. For the day, gold is once again an inflation-hedge, safe-haven, and risky asset.

Bitcoin

A broad risk-on rally on Wall Street is also helping send Bitcoin higher to the upper-boundaries of its recent $37,000 to $45,000 trading range. Bitcoin did get a boost after a Russian lawmaker hinted that they could suggest Bitcoin for oil payments. Using crypto to skirt sanctions however is not what the cryptoverse needs for long-term growth. Bitcoin should still remain confined to its recent trading range until institutional traders decide to rotate out of stocks.