Wall Street is debating what will be the impact that regional warfare will have on US stocks. The contagion risk will completely feed into inflationary pressures as energy costs will skyrocket and that will derail large parts of the economic recovery coming out of COVID.
Geopolitical risks could lead to a slower growth cycle and that could remove the risk of a half-point Fed rate hike at the March 16th FOMC decision. Risk appetite will start to see some support as investors start to price in a less aggressive Fed, more accommodation from the PBOC, and as geopolitical tensions will likely play out for a long time and have been mostly priced in.
US stocks are well off the morning lows as some traders feel a lot of expected Ukraine-Russia conflict was already reflected in the selling pressure that took place over the past few weeks. Geopolitical tensions will continue to undermine economic growth and that should keep equities very choppy until the Russia-Ukraine crisis has a clear conclusion and after the financial markets have a firmer handle on how aggressive Fed tightening will be. The pressure is building on Russia after German Chancellor Scholz halted certification of the NordStream2 pipeline. The US is expected to announce new sanctions on Russia following President Putin’s decision to send troops to two separatist pro-Moscow regions in eastern Ukraine.
US Data
Consumer confidence is weakening but the growth story for the year still remains intact. The headline confidence reading fell from a revised 111.1 to 110.5. Inflation concerns rose as both the present and expectations surveys dipped. The headwinds are visible to everyone but the weakness is modest at best. The economy and the consumer are still on solid footing and that should support a strong economic recovery once inflationary pressures that are stemming from geopolitical tensions abroad subside.
Bitcoin
Bitcoin dip-buying emerged as crypto selling was exhausted after Ukraine tensions reached a new high. Bitcoin was getting dangerously close to the low levels that were seen after it lost over half its value in January. Cryptos remain the ultimate risky asset and the escalation Russia-Ukraine will likely keep the volatility elevated with swings to 20% in either direction.
Bitcoin has been battered on surging Fed tightening bets and over geopolitical tensions, but most of those risks are getting close to being priced in. This crypto winter has been brutal but it might end once we get past that first Fed rate hike.
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