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Tuesday, February 15, 2022
The inflation-rate hike apocalypse has been canceled — for now
Just days ago, reactive markets were convulsed by fears of spiraling prices, and the prospect of a Federal Reserve making up for lost time with aggressive rate hikes to cool things down.
But one day is practically a lifetime in financial markets. This week, rising fears of a Russia-Ukraine conflict are putting inflation and the Fed on the back burner.
As risk assets sell off again, a flight to quality has made selling bonds an old and busted trade. The new hotness is a geopolitical conflict that runs the risk of engulfing Europe, worsening global supply bottlenecks, and potentially inflation, as Yahoo Finance’s Rick Newman noted on Monday.
“Markets do not like uncertainty, and this is causing a lot of uncertainty,” Meera Pandit, JPMorgan Asset Management’s global market strategist told Yahoo Finance Live on Monday.
“In the overall context of somewhat of a fragile market when it comes to sentiment … one of the biggest transmission mechanisms here is within the energy market, seeing higher oil prices,” Pandit said, something the Morning Brief warned was in the offing last week.
“This could be a bit of a headwind with global growth and a global consumer,” she added.
With that in mind, there are a few themes investors should monitor as geopolitics momentarily overwhelms economic fundamentals, and a hawkish Fed. The latter still very much dominates the outlook, but markets can no longer afford to minimize the former.
Sell (almost) everything risk-related
With a revanchist Russia undermining sentiment — and Dwayne “The Rock” Johnson’s impressive biceps aside — almost all risk-sensitive assets are in jeopardy of suffering more near-term losses. Yahoo Finance’s Brian Sozzi wrote on Monday why ditching stocks at this juncture would be “the wrong move,” and even the threat of World War III shall eventually pass.
CFRA analyst Sam Stoval believes that “equity markets are more at risk from the fallout from the war on inflation than on a potential invasion of Ukraine,” he wrote on Monday, adding that as “history reminds investors that surprise military and terrorist activities have traditionally been short-lived and represented an attractive buying opportunity.”
In the longer-run, that is certainly accurate — and we have TKer’s Sam Ro to remind us of his eternal refrain: Stocks usually go up. Yet for now, the market is selling risk first and asking questions later. And with all due respect to the bitcoin (BTC-USD) maximalists among us, the leading digital coin — back to trading nearly lock-step with stocks — isn’t behaving like anything that remotely approaches a safe-haven. Speaking of which...
Gimme shelter: Gold, bonds and low-yielding currencies
The need for safety from the squalls buffeting global markets has boosted demand for assets like gold, the U.S. dollar and government bonds, driving down yields that only days ago set pre-pandemic highs. In fact, Tradeweb data shows the spread between 2-year notes and the 30-year bond has narrowed appreciably, and is at its flattest since March 2020. Meanwhile, other parts of the curve — like the 2-year/10-year yield differential — are even flatter, and are getting closer to inversion, a condition that normally suggests slower growth.
Even gold (remember that?) is back in vogue. Goldman Sachs noted on Monday that even if the U.S. doesn’t directly intervene in Ukraine, the balance of risks are pushing bullion to levels well above $2,000 per ounce.
“The core thesis behind our bullish gold view, however, remains a spike in fear of potential U.S. recession as our economists forecast U.S. growth slowdown and tighter monetary policy from the Fed,” the firm noted.
Buy commodities (especially oil)
For consumers, one of the most tangible sources of price pressures emanates from energy. Soaring crude, which is creeping inexorably toward $100 per barrel, has been steadily nudging gas prices higher, and making people even grumpier about inflation. Various demand and supply-related factors have spurred oil and gas prices, but those “pale in comparison” to what could happen in the event of a Russia-Ukraine conflict, The New York Times noted on Monday.
“Economic growth remains vulnerable to events that could dampen oil consumption,” according to Henning Gloystein, director, energy, climate & resources Eurasia Group. “A disruption of Russian oil production would drive energy prices higher, and the inflationary impact would feed through to the wider global economy, ultimately undermining demand.”
Cash is still king
With high-yielding assets losing favor in this environment, some think it’s time for some investors to take money off the table, and maybe put it under a mattress (figuratively speaking).
"It is time for investors to raise cash. Cash is the ultimate king when markets are volatile,” noted George Ball, chairman of Houston-based Sanders Morris Harris, which has $4.9 billion in assets under management.
“An investor who usually holds 5% of their portfolio in cash, with the remaining in stocks and bonds, should raise the cash position to 10%-20% of their portfolio, with the remainder divided in the normal 60/40 fashion between stocks and bonds,” he added.
By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek
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