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Stocks fall, commodities surge as war angst intensifies

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The turmoil on global financial markets intensified Monday as U.S. stocks plunged the most in 17 months and commodity prices relentlessly powering higher as the fallout from war in Ukraine threatened to the global economy.

The S&P 500 sank almost 3% for its worst day since October 2020, while the tech-heavy Nasdaq 100 Index dropped 3.7%. Nickel surged 90% to a record on worry over potential shortages, oil settled at the highest in a decade and wheat approached records after a 7% jump. Earlier, the Euro Stoxx 50 and Germany’s DAX index closed in bear markets. The spread between two-year and 10-year Treasuries briefly dropped below 20 basis points, a level not seen since March 2020 and a bearish sign for the economy.

Russia’s war on Ukraine and the sanctions from U.S. and European allies on Russian assets have sent a jolt through financial markets that were already unsteady after two years of the pandemic and the threat of central banks pulling back on stimulus. Investors have grown leery of owning riskier assets as surging commodity prices exacerbate inflationary pressures that could force policy makers to tamp down growth.

“The longer oil prices and inflation remain elevated — and thereby threaten an early demise of this economic expansion and bull market — the more investors will trim their exposure to equities,” wrote Sam Stovall, chief investment strategist at CFRA. “Investor uncertainty should elevate the angst.”

Markets emerged from the weekend on edge after reports that the Biden administration is considering whether to ban the import of Russian oil and energy products, a move that could add to economic pressure as more companies pull out of the country in response to Moscow’s invasion of Ukraine. European Union governments were divided over whether to join the U.S.

The U.S. bond market’s 10-year inflation forecast jumped to a record 2.785%, while the yield on the benchmark Treasury bond rose 5 basis points at 1.78%. A gauge of the dollar rose for a third day, trading at the highest since 2020.

Bond market’s gauge of inflation expectations rises to all-time high
There was no immediate statement from the Russian negotiators. With President Vladimir Putin saying Kyiv must agree to his demands if fighting is to end, the discussions face severe challenges.

Putin signed a decree allowing the government and companies to pay foreign creditors in rubles, seeking to stave off defaults while capital controls remain in place. Still, some holders of a $1.3 billion Gazprom PJSC bond due Monday said they received payment in dollars.

More businesses pulled back on their operations in Russia, including streaming giant Netflix Inc. and social-media service TikTok, which is owned by China-based ByteDance Ltd.

Meanwhile, China warned the U.S. against trying to build what it called a Pacific version of NATO, while declaring that security disputes over Taiwan and Ukraine were “not comparable at all.”

The global economy was already struggling with high inflation due to the pandemic. The Federal Reserve and other key central banks now face the tricky task of tightening monetary policy to contain the cost of living without upending economic expansion or roiling risky assets.

“There’s no easy map for navigating market volatility,” said Saira Malik, chief investment officer at Nuveen. “Volatility is normal late in economic cycles, and it is needed to some degree to generate positive returns in any environment. Investors, however, are concerned that this latest market disruption could hasten the end of the cycle.”


Some of the main moves in markets:Stocks

The S&P 500 fell 3% as of 4 p.m. New York time
The Nasdaq 100 fell 3.7%
The Dow Jones Industrial Average fell 2.4%
The MSCI World index fell 2.8%
Currencies

The Bloomberg Dollar Spot Index rose 0.8%
The euro fell 0.5% to $1.0871
The British pound fell 0.9% to $1.3110
The Japanese yen fell 0.4% to 115.26 per dollar
Bonds

The yield on 10-year Treasuries advanced five basis points to 1.78%
Germany’s 10-year yield advanced five basis points to -0.01%
Britain’s 10-year yield advanced 10 basis points to 1.30%
Commodities

West Texas Intermediate crude rose 3.7% to $119.99 a barrel
Gold futures rose 1.7% to $2,000.30 an ounce–With assistance from Andreea Papuc, Abigail Moses, Peyton Forte and Isabelle Lee.
SOURCE: BLOOMBERG

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BUSINESS

US stocks suffer biggest daily drop in almost two years

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US stocks posted the biggest daily drop in almost two years as investors assess the impact of higher prices on earnings and prospects for monetary policy tightening on economic growth. The dollar and Treasuries gained amid a pickup in haven bids.

The selloff sent the S&P 500 down 4%, with the plunge in consumer shares surpassing 6%. Target Corp. tumbled more than 20% in its worst rout since 1987, after trimming its profit forecast due to a surge in costs. Shares of retailers from Walmart Inc. to Macy’s Inc. were caught in the downdraft. The Nasdaq 100 fell the most among major benchmarks, dropping more than 5% as growth-related tech stocks sank. Megacaps Apple Inc. and Amazon.com Inc. slid at least 5%.

Treasuries rose across the board, sending the 10- and 30-year Treasury yields down as much as 11 basis points. The dollar rose against all of its Group-of-10 counterparts, except the yen and Swiss franc. Gold caught bids in the move into havens.

The benchmark S&P 500 is emerging from the longest weekly slump since 2011, but any rebounds in risk sentiment are proving fragile amid tightening monetary settings, Russia’s war in Ukraine and China’s Covid lockdowns.

In some of his most hawkish remarks to date, Federal Reserve Chair Jerome Powell said Tuesday that the US central bank will raise interest rates until there is “clear and convincing” evidence that inflation is in retreat. Chicago Fed President Charles Evans said Wednesday he sees a half-point rate increase at next month’s meeting and “probably thereafter.”

In Europe, new-vehicle sales shrank for a 10th month in a row as the industry remains mired in supply-chain crises, while euro-area inflation plateaued at a record high. Meanwhile, UK inflation rose to its highest level since Margaret Thatcher was prime minister 40 years ago, adding to pressure for action from the government and central bank.

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Netflix lays off 150 employees due to slow revenue growth and business needs

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Netflix is reportedly laying off nearly 150 employees in the coming days due to disappointing earnings and slow revenue growth.

According to a Variety report, the Amazon Prime Video rival might also terminate its contract with contractual contributors.

The layoffs are about 2 per cent of Netflix’s US workforce. “As we explained [in reporting Q1] earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly U.S.-based,” a Netflix spokesperson said.

The statement further revealed that the decision was primarily driven by business needs rather than individual performance. Netflix reported $7.87 billion in Q1, which was short of Wall Street’s estimates of $7.93 billion.

The report further reveals that nearly 70 part-time employees in Netflix’s animation studio will have to pack up and leave. A report by The Verge stated that about 26 contractors working on Netflix’s fan-focused Tudum website might see a termination.

“A number of agency contractors have also been impacted by the news announced this morning. We are grateful for their contributions to Netflix,” the company said.

Netflix, in its recent earnings call, revealed that it lost thousands of subscribers, which is a first for the company in over a decade.

The company expects to lose an additional 2 million in the next quarter due to the ongoing war between Russia and Ukraine. Netflix has shut shop in Russia following the country’s invasion of Ukraine.

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Dollar breaks N600/$ ceiling ahead of party’s presidential primaries

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Less than two weeks to the presidential primaries of the political parties ahead of the 2023 elections, the US dollar has broken the N600/$ mark at the parallel market and set the tone for a possible uptick in the coming days.

The black market rate had traded between N570/$ and N590/$ since the beginning of the year while the Central bank of Nigeria (CBN)’s intervention at the Nigerian Autonomous Foreign Exchange (NAFEX) has kept its rate under N420/$.

With the latest slump of the naira, the arbitrage between the parallel and NAFEX, which is regarded as the official window, is now inching close to N200/$. The spread measures the deviation of the controlled official rate from the real rate of exchange, with experts calling for liberalisation of the market to enable naira to find its true value.

The World Bank and the International Monetary Fund (IMF) have also warned of the repercussions of sustaining an artificially high naira while calling on the CBN to embark on market reform.

But the CBN has maintained that Nigeria, with the current high level of importation and underperformance of the industrial sector, cannot afford to float the naira completely as the exchange rate could spill out of control.

At the Lagos street market, yesterday, naira traded between N595/$ and N600/$ band. With the presidential primaries of the two leading political parties scheduled for Abuja next weekend, there is an expectation the demand pressure has not peaked, suggesting that naira is in for a protracted pressure.

At peer-to-peer (P2P) trading platforms, the dollar has been trading above N600 in the past three weeks, which had signaled that the black market rate could break through the psychological ceiling.

With that eventually happening, naira could be on a renewed free fall.

But there is also hope that it is a season to offload warehoused hard currencies for political campaigns to possibly shore up supply.

Experts are not sure where rising demand and supply of foreign exchange would lead the naira to, but the interplay between the movements of the two variables is a key factor in predicting the value of the naira in the tense political season. Godwin Owoh, a professor of applied economics, advised Nigerians to prepare for a steeper fall of the local currency, saying partisan politics and intra-party meetings, which are highly dollarised would bring much pressure to bear.

The CBN has promised to continue to protect the naira but its ability could be constrained by the equally falling reserve. For the first time in eight months, the gross reserves dropped below N39 billion on Monday, when CBN data put the figures at N38.92 billion. Effectively, the country’s reserves have depleted by $160 billion year-to-date.

Bismarck Rewane, an economist, had projected the reserve to collapse to $32 billion in the year as he expected the CBN to spend $8 to $10 billion defending the naira, which is taking much pressure from excessive importation.

The value of Nigeria’s imports increased by 64 per cent last year to N20.84 trillion. Sadly, the value of exports increased at a slower rate – 51 per cent – to N18. 91 trillion in the same period. The falling reserves and rising imports have put the apex bank in dire straits in its efforts to continue to defend the naira.

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