Oil Prices Plunge On Shanghai Lockdown, And Ukraine Is Willing To Negotiate With Russia

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

(Monday Market Open) U.S. Stock Futures are flat this morning. The price of Crude Oil (CL) dropped 6% Monday to $108 a barrel. A COVID-19 lockdown is underway in China’s largest city, and Ukrainian President Zelensky is ready to accept a neutral status as part of a peace deal with Russia. Bond yields are near a three-year high as investors prepare for interest rate increases from the Federal Reserve. The White House is set to propose new restrictions on buybacks and a minimum tax on households worth more than $100 million.

Potential Market Movers

Crude oil (CL) continues to slide this morning, now down 6% in anticipation of a drop of fuel demand in China. Authorities in Shanghai said they would shut down the country’s financial hub to carry out Covid-19 testing over a period of nine days. Beginning Sunday, public transportation, including ride-hailing services, were suspended during the lockdown. Unapproved vehicles will not be allowed on the roads. All companies and factories will suspend manufacturing or have people work remotely. This follows a reported 3,500 new cases on Sunday in Shanghai.

This adjustment in crude oil comes after seeing a 10.5% jump in oil prices last week as markets consider the supply disruptions caused by sanctions against Russian energy, damage to a major pipeline in the Black Sea, and militant attacks on some Saudi oil facilities. Meanwhile the European Union continues to rely on Russian oil imports without a ban in place.

President Zelensky told journalists he was ready to accept a neutral, non-nuclear status of Ukraine to reach a peace agreement with Russia. These comments come as Turkey is set to host the next round of talks between Russian and Ukrainian delegates in Istanbul on Tuesday. In a video message posted to social media, Zelensky said he is looking for peace without delay. Turkish President Tayyip Erdogan told Russian President Vladimir Putin via telephone that a ceasefire in Ukraine and peace between the two countries is needed as soon as possible. Ukrainian intelligence says Moscow wants to divide the country like North and South Korea.

Bond yields are near a three-year high as investors prepare for interest rate increases from the Federal Reserve. 30-year mortgage rates are up to 4.95%. Home makers are slowing production as they have had a hard time getting supplies and appliances. Meanwhile existing home sale prices remain at unprecedented highs, making affordability out of reach for many buyers.

The White House plans to propose new restrictions on stock buybacks and a minimum tax on households worth more than $100 million. Last year, companies in the S&P 500 repurchased a record $882 billion of their own shares. This year is off to an even stronger start, with analysts at Goldman Sachs forecasting buybacks will set another record, reaching $1 trillion.

According to DealBook, the proposal will call for a three-year freeze on corporate executives selling their shares after a buyback. To support this move, the administration is likely to cite academic research that found company executives tend to sell far more stock in days following a buyback announcement than at any other time. Other research shows that buybacks have accounted for an increasingly large share of corporate profits (often more than 50% of net income) over the years. Apple (AAPL) has spent more than $420 billion buying back its shares over the past decade.

Tesla (TSLA) wants to split its stock so it can pay a stock dividend. The SEC filing said the car maker will ask shareholders to increase the number of authorized shares of common stock in order to achieve a stock split and start paying dividends. Tesla last split its stock in August of 2020.

Three Things to Watch

Reviewing Consumer Sentiment: The University of Michigan’s consumer sentiment report showed that consumers are now more pessimistic than during the pandemic. The index dropped to 59.4 in March, down from 84.9 from the prior year. Sentiment numbers have declined for three straight months, reaching the lowest reading since August 2011.

Much of the decline has been attributed to rising inflation, rising interest rates, and the Russia-Ukraine war. Domestically, the biggest impact to the consumer sentiment numbers may have come from the spike in oil prices, which climbed near all-time high levels at the beginning of the month. The consumer sentiment announcement caused Treasury yields to continue higher on Friday, closing at 2.49%. When Treasury yields reach 2.5% or higher, the risk-free trade for Treasuries can attract more investors and put downside pressure on equity prices.

CHART OF THE DAY: TNX ON THE MOVE. The 10-year Treasury (TNX) Index is often correlated with weaker economic expectations. Typically, when yields rise above 2.5%, Treasuries become more competitive with equities.

Eyes on the Yield Curve: Many investors believe that one of the better indications of a recession is an inverted yield curve in the Treasury market. Higher yields on shorter-term debt instruments than of longer-dated instruments invert the yield curve. When this occurs, it reflects bond investors’ expectations for a decline in longer-term interest rates, which is generally associated with recessions. Typically, the yield curve has an upward slope, which reflects the fact that longer-term debtholders carry more risk, as the possibility of more negative events can occur over a longer duration of time. The yield curve will invert when it goes below zero. Currently, the yield curve for the 10-year Treasury constant maturity minus the 2-year Treasury has dropped from a high of 1.59 in March 2021, down to .21. This yield curve has not seen level this depressed since March 2020. 

The 2-10 Treasury Yield: Investors will typically use the spread between the yields on 2-year and 10-year U.S. Treasury bonds as a relatively reliable leading indicator of a recession.

Stagflation can occur in an economy when it simultaneously experiences both an increase in inflation and a stagnation of economic growth. Stagflation is also thought to occur when a sharp increase in the cost of oil quickly reduces an economy’s capacity to produce. When a country’s economic growth slows, it will tend to lead to an increase in unemployment, creating further declines in economic output. So, what’s the remedy for stagflation? Generally, economic productivity would have to be raised to a level where it leads to higher growth but without additional inflation. A tighter monetary policy could then be used to rein in the inflation piece of stagflation. However, this could be very challenging process for a Federal Reserve that already has a lot on its plate. Taking steps to avoid stagflation now would clearly be the best approach.

Notable Calendar Items

March 29: JOLTS Job Openings

March 30: ADP Nonfarm Employment Report

March 31: Core PCE Price Index

April 1: Unemployment Rate, ISM Manufacturing

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

Image sourced from Unsplash

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