Analysts Change Economic Projections To Account For Rising Commodity Prices

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(Tuesday Market Open) Stocks look to bounce back from Monday’s selloff, hoping that Monday was a “wash out” day—a day where investors are able to unload their riskier assets to focus on blue chip and value. However, the Cboe Market Volatility Index (VIX) is higher on Tuesday morning, suggesting investor fear is still high. Oil prices are higher once again, trading more than 2% higher on a volatile overnight session.

On the bright side, investors appear to be getting help overseas as European markets were trading higher. The STOXX Europe 600 was 0.81% higher. The German DAX was rallying 1.51%. And the French CAC 40 was up 1.91%.

The Asian-Pacific markets are looking a little less bright. The Japanese Nikkei 225 fell 1.71%; the Hong Kong Hang Seng Index dropped 1.39%, and the Shanghai Index tumbled 2.35%.  

The Good, Bad, & Ugly

Some of the market’s old reliable stocks fell hard on Monday. Amazon AMZN is testing its January lows after falling 5.62% on Monday. Alphabet GOOG also fell 4.28% near its support level around 2,500. Apple (NASDAQ: AAPL) is also near support after falling 2.37%. Microsoft MSFT is in the same boat near support after selling off 3.78%. These companies could be the hope that the bulls need. If they’re able to hold support, stocks could get the bounce they need because of the combined market cap of these companies in the S&P 500.

While big-tech could act as an anchor for the S&P 500, banking appears to be a hole in the boat. The PHLX KBW Bank Index fell 4.62% on Monday. Additionally, financials are the second largest sector in the Russell 2000 (RUT), which helped the small-cap index fall 2.48% on Monday.

Banks were hit hard by credit card companies ending services in Russia. Visa V fell 4.79%, Mastercard MA dropped 5.39%, and American Express AXP tumbled 7.99%. Falling yields are also pulling the banking sector lower because they’re shrinking the spread between lending and saving. For a couple months, all anyone could talk about was the Fed and next week’s rate decision, but now that story has faded into the background.

Oil Issues

The S&P 500 (SPX) broke the 4,300 support level that had been in place since July of 2021 and tested a few times after WTI crude oil futures spiked over the weekend—trading as high as $130 per barrel—as an increasing number of companies are choosing not to buy Russian oil. However, oil prices retreated to $120.10, which was still 3.8% higher than the closing price on Friday.

Rising oil prices helped the energy sector to be one of two sectors in the green on Monday. Investors appeared to favor the defensive nature of utilities overall because the Utilities Select Sector Index rose 1.31%. Treasuries also benefited from investors searching for safe havens because the 10-year Treasury yield (TNX) fell 1.57%. Bond prices were even most of the day, but they found a lot of interest as the day wore on and investors started looking for safety. A third safe haven appeared to be gold. Gold futures rallied 1.81% moving back above $2,000 returning to August 2020 highs. Gold continues to rally on Tuesday, up another 0.90% in premarket trading.

Fear is high enough that initial public offerings (IPO) are disappearing. January had a record number of cancellations at 22. Currently, there are no IPOs listed on the Nasdaq IPO Calendar for any American exchange in March or going forward.

Commodity Conundrum

Oil was not the only petroleum product to spike. RBOB gasoline futures rallied more than 10% over the weekend but gave back most of its gains and closed just 1.17% higher on the day. Before Tuesday’s open, gasoline futures were up another 2.24%. Heating oil futures closed 4.82% higher despite reaching nearly 13% higher Sunday evening. This morning, heating oil is looking to recover Sunday’s high as the futures are trading 7.53% higher before the bell.

The reasons for the spikes are that many private companies are refusing to buy Russian oil and the United States and European allies are considering bans on Russian commodities according to U.S. Secretary of State Antony Blinken. Previously, these groups have avoided bans on Russian commodities because of how these embargos could hurt consumers already struggling under the weight of pandemic-related inflation.

Embargos on oil could be quite expensive and it’s causing some analysts to change their projections. Analysts from Bank of America BAC said if Russia’s 5 million barrels per day were to end, oil prices could rise to $200. JP Morgan JPM analysts are forecasting oil prices at $185 per barrel this year. Analysts from Mitsubishi UFJ Financial Groups MUFG were projecting oil at $180 per barrel and added if that price was reached it would probably cause a global recession.

Expensive oil is also weighing down economic forecasts. The CNBC Rapid Update shows that the median forecast for the U.S. gross domestic product (GDP) for Q1 is just 0.5%. Strategists and analysts from Citi C, UBS UBSG, Yardeni Research, and Evercore ISI have all lowered their U.S. equity outlook because of the Russian-Ukrainian conflict. Additionally, the AMEX Airline Index XAL fell 13.27% on Monday as investors considering the higher cost of fuel decide to sell shares in airlines.

Government officials are hoping that reduced sanctions on Iran and Venezuela will get more oil supplies to market and help alleviate some of the pricing pressures. Additionally, Republicans are pressuring President Joe Biden to repeal some of his executive orders signed when he first came into office. These orders banned some offshore drilling as well as some drilling on public lands.

Outside of petroleum products, grain commodities are also seeing large rallies that are leading to lock limit events. Wheat futures shot up 7% on Monday’s open and immediately hit its sixth lock limit event in a row. Wheat is up 72% from its February low. Grain manufacturer Archer-Daniels-Midland ADM rallied more than 1% on the news and is up more than 13% from its February low. Wheat appears to be losing a little momentum on Tuesday because its futures contracts are just 0.79% higher in premarket trading after a very volatile overnight session that saw a rise of more than 5% and a fall of more than 7%.

Interest in Rates

Rising inflation and falling economic forecasts has rekindled talk of stagflation. Stagflation is the economic phenomenon where a country sees rising inflation despite a slow economy. The United States experienced stagflation in the late 70s which resulted in the Fed hiking the overnight rate to 20% in the early 1980s.

The Consumer Price Index (CPI) which measures inflation comes out on Thursday and will provide important inflation information in preparation for next week’s Federal Reserve interest rate decision. After Fed Chairman Jerome Powell told Congress last week that he favored a quarter point hike, the market has adjusted its expectations accordingly. The market is also confident that another hike will come in May, but the picture is increasingly unclear because of the Russian-Ukraine conflict.

Looking at individual stocks, Bed Bath & Beyond BBBY jumped more than 35% on Monday because of the news that GameStop GME chairman and Chewy CHWY co-founder Ryan Cohen’s company, RC Ventures, took a 10% stake in the company. However, after the close some analysts reasserted their outlooks on BBBY, pointing out that expectations haven’t changed on the company and contradicting Mr. Cohan’s assessment that the company is worth “multiple” billions. The stock was trading 4.15% lower in premarket trading.

Activist investors appear to be giving department store Kohl’s KSS some issues. On Monday, the company held its first every shareholder conference and laid out their plan for the future. However, the stock has fallen nearly 13% on the day today after the company’s management has chosen to reject takeover offers last year in order to try to reform the company themselves. Macellum Advisors and Engine Capital have been vocally skeptical of the company’s management’s ability to engineer a turnaround.  

Pitter Pattern: The S&P 500 (SPX) appears to be creating a head and shoulders pattern which is considered by technical analysts to be reversal pattern. My technical analysts friends tell me that the break of support at the 4,300 level completed the pattern. If the pattern works like technicians expect, the SPX should fall to about 3,800 over the next six months. This is calculated by measuring the difference between the top of the head to the shoulder line and the subtracting the amount from the shoulder line.

With that said, the shoulder line was broken about two weeks ago and the bulls were able to push the index back above the line. So, the question is, “Can the bulls stampede again?”

Getting Shanghaied: Major credit card companies Visa V, Mastercard MA, and American Express AXP stopping services in Russia; this is providing an opportunity for China’s UnionPay to provide payment services. UnionPay is big in China and growing in India. With the addition of Russia, UnionPay could have access to some three billion potential customers.

In fact, the exclusion of Russia from the SWIFT (Society for Worldwide Interbank Financial Telecommunications) payment system is providing another opportunity to China in the use of their CIPS (Cross-Border Interbank Payment System). While sanctions on Russia appear to be hurting Russia, they could be a boon for China.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Pixabay

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.