Friday's Market Minute: Bearish Momentum Takes A Momentary Break

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Financial markets continue to whipsaw as the developments in Ukraine and threat of tighter monetary policy have weighed on investors. The Ukraine situation has had a lot of people spooked, and there has been a recent flight to safety in commodities, precious metals, and bonds. The escalation of conflict is dominating the global economic narrative because of the potential for Russia’s energy and resources being cut out of global supply chains. This has the potential of exacerbating already high inflation and further binding the Fed into deciding to either stay the course on raising rates quickly, or at modest pace after determining the impact to the economy. 

Altogether, yesterday’s rally was a great success for risk-taking bulls. Yet, one day does not make for a trend change, and the bears are still in control. Bearish momentum hit extremes and left sellers exhausted. Institutions covered short positions as the evolution of fear built up over the past week proved to be a contrarian indicator.

The recent weakness in equity markets appears to be more sentiment-induced rather than economically driven. The yield curve implies that financial conditions are already tightening, as the spread between short and long-duration bonds continues to narrow. However, the Fed will not want to shock markets, which have been in a correction for over two months now, with aggressive tightening and overly-hawkish statements. Despite the market turmoil so far this year, it is important to remember that the start of policy tightening is usually a confirmation that the economic cycle is still in a robust uptrend rather than the signal of its end.

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