The S&P 500 fell 1.6% on Tuesday in a risk-off session, which saw oil prices peak above $106 per barrel and Treasury yields drop noticeably in response to worsening geopolitical tensions. The Nasdaq Composite (-1.6%), Dow Jones Industrial Average (-1.8%), and Russell 2000 (-1.9%) also declined more than 1.5%.
Tensions worsened as Russian forces attacked civilian areas in Ukraine and Russia’s defense ministry warned of missile strikes on Ukrainian intelligence and communications facilities in Kyiv. Satellites images of a 40-mile long convoy of Russian military vehicles approaching Kyiv were especially unnerving for the market.
The stock market tried to shake off the bad news with a flat open, but the understanding that things could get worse before they get better – with a negative impact to growth prospects – washed out the buyers.
Ten of the 11 S&P 500 sectors closed lower, with the financials sector (-3.7%) taking the brunt of the damage and the information technology sector (-1.9%) acting as a heavy drag. Growth and value stocks alike declined together.
The energy sector (+1.0%), unsurprisingly, closed higher, but it was a little surprising to see just a 1.0% gain when oil prices settled higher by 8.3%, or $7.88, to $103.41/bbl. The relative disconnect might have been owed to the view that the high oil prices will give way to decreased demand.
Interestingly, oil prices received little relief from an agreement among 31 IEA member countries to release 60 million barrels of oil from their reserves. Supply-constraint fears were the primary driver for prices, which in turn, could dampen consumer sentiment and spending.
The Treasury market was a signpost for growth concerns, which were further exacerbated by more U.S. companies restricting their services in Russia and by relatively disappointing guidance from Zoom Video ( ZM 122.78, -9.82, -7.4%), GoodRx ( GDRX 16.73, -10.67, -38.9%), and Ambarella ( AMBA 96.03, -43.68, -31.3%).
The 10-yr yield accordingly dropped 13 basis points to 1.71% (-28 bps in two days). The 2-yr yield also dropped 13 basis points to 1.30% (-27 bps in two sessions) on the burgeoning belief that the Fed will be less hawkish than previously feared because of the geopolitical risks to the economy.
The U.S. Dollar Index rose 0.7% to 97.35. The CBOE Volatility Index rose 10.5% to 33.32. Gold futures rose 2.3% to $1944.70/ozt.
Reviewing Tuesday’s economic data:
- The February ISM Manufacturing Index increased to 58.6% (Briefing.com consensus 58.0%) from 57.6% in January. A number above 50.0% is indicative of expansion. February marked the 21st straight month of expansion for the manufacturing sector.
- The key takeaway from the report is that new orders growth helped drive the faster expansion activity in February, showing that the effects of the Omicron variant had lessened; moreover, a strong pickup in the backlog of orders index – the largest since January 2011 – is a reflection of pent-up production potential that should keep the manufacturing sector in an expansion mode.
- Total construction spending increased 1.3% month-over-month in January (Briefing.com consensus -0.4%) following an upwardly revised 0.8% increase (from 0.2%) in December. That was the strongest increase since the same period a year ago.
- The key takeaway from the report is that there was strength in both residential and nonresidential spending, reflecting a fairly broad-based pickup in construction spending activity.
- The final IHS Markit Manufacturing PMI for February decreased to 57.3 from 57.5 in the preliminary reading.
Looking ahead, investors will receive the ADP Employment Change report for February, the Fed’s Beige Book, and the weekly MBA Mortgage Applications Index on Wednesday.
- Dow Jones Industrial Average -8.4% YTD
- S&P 500 -9.7% YTD
- Russell 2000 -10.6% YTD
- Nasdaq Composite -13.5% YTD
Overseas:
- Europe: DAX -3.9%, FTSE -1.7%, CAC -3.9%
- Asia: Nikkei +1.2%, Hang Seng +0.2%, Shanghai +0.8%
Commodities:
- Crude Oil +8.09 @ 103.43
- Nat Gas +0.16 @ 4.58
- Gold +44.70 @ 1944.60
- Silver +1.17 @ 25.55
- Copper +0.11 @ 4.59