Last Week in Review – March 4, 2022

Last Week In Review

Last week stocks ended lower as investors continued to weigh developments in the crisis in Ukraine. The S&P 500 Index was dragged lower by the heavily-weighted technology, financials, consumer discretionary, and communication services sectors, but all other segments moved higher. The energy sector performed best, as international oil prices traded as high as nearly USD 120 per barrel on Thursday before news of a possible Iran nuclear deal caused them to retreat a bit. The CBOE Volatility Index (VIX) reached its highest point in over a year, although traders noted that volumes did not reach levels seen in previous times of market turbulence.

News out of Ukraine was fluid as the market seemed to trade on various news reports. Unfortunately, the situation didn’t improve as the week went on, and the market continued its yearly trend lower.

Developments that appeared to pressure stocks last week included:

• The European Union, the UK, and the U.S. agreed to exclude several Russian lenders from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international banking network.
• Western powers announced further sanctions against Russia. Last Wednesday, MSCI announced that it would remove Russian securities from its indices, and U.S. authorities weighed restrictions on Russian imports. On Thursday, President Biden announced new penalties targeting Russian oligarchs with close ties to Russian President Vladimir Putin.
• Following Putin’s order to raise nuclear forces to a higher state of alert, Belarus adjusted its laws to warehouse atomic weapons. Putin and other officials continued to make veiled threats over the week, leading to panic buying of iodine in parts of Central Europe. Futures plunged on Thursday evening on news that Europe’s largest nuclear power station had been attacked, although stocks seemed to stabilize on information that no radiation had been released.
• The ruble plunged on the international currency markets despite the Russian Central Bank’s move to raise the policy rate from 9.5% to 20%. The ruble continued to move lower throughout most of the week, pushing its value under USD 0.01, a record low.

Developments in the crisis appearing to cushion the market’s declines included:

• Following talks between Ukraine and Russia over the previous weekend, Ukraine announced on Wednesday that it would take part in the second round of negotiations with Moscow. After the talks on Thursday, a Ukrainian negotiator said that the second round had not produced the hoped-for results, although he added that the two sides agreed to speak again. Somewhat more optimistic comments came from Russian officials, who highlighted an agreement on humanitarian corridors for civilians.
• Russia’s invasion was denounced by the United Nations General Assembly on Wednesday, underscoring Moscow’s increasing isolation on the global stage.

US – Markets & Economy

Domestic policy events seemed to have a secondary role in shaping sentiment during the week. However, investors did pay close attention to Federal Reserve Chair Jerome Powell’s Congressional testimony last Wednesday and Thursday. Powell stated that it was “too early to say” if Russia’s invasion would change the Fed’s policy over the medium term but that policymakers would “move carefully.” Powell also said he was inclined to stick with a quarter-point increase in the federal funds rate in March, dispelling fears of a 50-basis-point (0.50%) increase. Indeed, futures markets began pricing in a small probability of no hike at all, according to CME Group data.

Last week’s economic data offered conflicting signals on how aggressively the Fed would have to act to tame inflation. On Friday, the Labor Department reported that employers added 678,000 nonfarm jobs in February, well above consensus expectations of around 400,000. However, average hourly earnings remained steady, defying expectations for a 0.5% increase. The ISM gauge of factory activity in February indicated slowing growth in the services sector, although the IHS gauge indicated a solid acceleration.

Investors continued to worry about soaring prices in the wake of Russia’s invasion of Ukraine, and traders noted that commodity prices were off to their strongest start to the year since 1915. Sanctions have prompted banks to suspend financing for Russian commodity trades, potentially impacting supplies of energy, crops, and metals. The steps leave auto manufacturers vulnerable to parts shortages, chip manufacturers wary of shortages of inputs like xenon and palladium, and food manufacturers potentially facing reduced wheat and sunflower oil supplies.

The longer-term effects of this conflict and the sanctions could cause gas prices to move well into the 5+ dollar a gallon range (and I am not talking about just California) and supply issues with fertilizer needed to grow crops which could cause supply shortages in essential foods.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

The risk-off environment due to the Ukraine crisis and Powell’s comments pushed the yield on the benchmark 10-year U.S. Treasury note to its lowest intraday level in two months. (Bond prices and yields move in opposite directions.) Despite the rally in Treasuries, the broad municipal bond market logged slightly negative results through most of last week. Tax-exempt bond investors remained cautious, according to municipal traders, with the prospect of continued outflows from municipal bond funds, a potential increase in new issuance, and broader interest rate volatility seeming to weigh on sentiment.

At the beginning of last week, investment-grade corporate bonds weakened amid deteriorating economic sentiment and elevated forward supply expectations. As the week progressed, the primary calendar picked up, with Wednesday marking the most active day by issuer count since September 2021. Given the geopolitical uncertainty and equity volatility, the high yield bond market was quiet amid lighter-than-normal trade volumes. Buyers in the bank loan market appeared to step to the sidelines to wait out the volatility as a continued escalation in Ukraine weighed on risk assets.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Last week shares in Europe fell sharply as investors weighed the possible implications of Russia’s ongoing invasion of Ukraine. The pan-European STOXX Europe 600 Index returned about 7% of its value in local currency terms. Major indexes tumbled. Germany’s DAX Index and France’s CAC 40 Index dropped more than 10%, while Italy’s FTSE MIB Index lost more than 12%. The UK’s FTSE 100 Index pulled back 6.7%.

Core Eurozone bond yields declined overall in a volatile week of trading. They fell sharply on Friday as ceasefire talks between Russia and Ukraine failed, and fighting intensified. Peripheral eurozone and UK gilt yields broadly tracked core markets.

The European Union (EU) and the UK joined the U.S. in imposing sanctions on Russia for invading Ukraine, headlined by measures seeking to curtail Russian access to their capital markets and financial system. Some Russian banks, for example, were cut off from the SWIFT payments messaging system. The EU also shut down its airspace to Russia, tightened export controls on high-end technology, and took steps aiming to freeze some assets of Russian President Vladimir Putin and Foreign Minister Sergei Lavrov, among others.

European Central Bank (ECB) officials appeared to signal a change in tone on monetary policy. Greek central bank Governor Yannis Stournaras and Mario Centeno, the head of the Portuguese central bank, said that the Russia-Ukraine and consequent sanctions could increase pressures in energy markets, push up inflation, and curb economic growth by disrupting trade and hitting household and business confidence. Executive Board member Fabio Panetta said in a speech that “It would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer.” Panetta added, “We should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer.” Chief Economist Philip said in Berlin that the ECB stands ready “to take whatever action to fulfill its responsibilities to ensure price stability and financial stability in the euro area.”

Inflation in the eurozone in February accelerated to a record 5.8%, up from 5.1% in January, as costs of energy and food surged, according to preliminary data from Eurostat.

EU Economics Commissioner Paolo Gentiloni said that Brussels would “reassess” whether to reimpose its 2023 budget guidance in two months, indicating that an opt-out from EU debt and deficit limits beyond this year might be extended. “Russia’s invasion of Ukraine will likely impact growth negatively, including through repercussions on financial markets, further energy price pressures, more persistent supply chain bottlenecks, and confidence effects that we should not under-evaluate,” Gentiloni said.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com