Equity Index Futures Point Lower After Energy Commodities Surge

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Stock markets are slightly down heading into the market open. Oil and Energy commodities are surging again after the European Union indicated it would consider more sanctions against Russia—this time including energy. Meanwhile aggressive Russian attacks on Ukraine continued over the weekend, with Russia using new hypersonic missiles on attacks in Mykolaiv.

Potential Market Movers

The aggression of Russian forces over Ukraine continued over the weekend. Russia claimed it used new Kinzhal “hypersonic” missiles twice in combat for the first time. Over the weekend, Russia claimed it had destroyed a fuel depot near Mykolaiv, an underground missile and ammunition storage site in the west. Ukraine’s government has confirmed the attacks but said it was not yet able to say what type of missiles were used.

Ukraine’s city of Mariupol has been besieged by Russian forces for almost four weeks, but Ukraine refused Moscow’s demand to lay down arms and surrender by 5 a.m. Monday. Meanwhile, many of the cities’ 400,000 residents remain trapped in the city with little, if any, food, water, or power.

President Biden and China’s President Xi Jinping spoke for nearly two hours by phone on Friday as Biden tried to convince Beijing not to send military aid to support Russia’s war in Ukraine. Biden also underscored his support for a diplomatic resolution to the crisis. It wasn’t immediately clear how Xi Jinping would respond to Biden’s warnings or if he’s decided whether to help Russia. Today Biden is hosting a call with European leaders to discuss the Russian war situation.

Crude oil prices surged again after the European Union’s top diplomat, Josep Borrell, said the bloc is considering expanding sanctions on Russia to include energy. Energy purchases from Russia had been exempted from previous rounds of EU sanctions due to the lack of short-term alternatives. Over the weekend, Germany’s vice chancellor Robert Habeck signed a deal with Qatar to expedite shipments of liquefied natural gas from the gulf nation.

Keep an eye on commodity prices, which keep increasing as we head into the trading day. Crude, Brent, and heating oil are up at least 4%, and wheat is up 3.%. Barron’s reported food prices have surged at the highest rate in the last 40 years. Your wallet may have already noticed these changes.

Stocks on the move this morning include Boeing (BA), down 6% following a crash of a China Eastern Airlines (CEA) Boeing 737. CEA shares premarket are down 12%. The cause of the crash is under investigation.

An average of 80,468 Covid cases per day were reported in United Kingdom in the last week, according to the New York Times. Cases have increased by 79% from the average two weeks ago. Deaths, however, have decreased by 1 percent. New cases have spiked in South Korea as well, where the government is reporting a seven-day average of 388,085.

Reviewing the Market Minutes

The housing market took a hit in February as existing home sales came in well below analyst estimates and fell 7.2%, which was worse than the 1% drop that was forecasted. This report adds to a number of other weaker housing reports earlier in the week. On Thursday, Freddie Mac reported that its survey revealed mortgage rates rose to 4.16% and building permits and housing starts were higher than expected but lower than the previous year.

Friday’s triple witching had the potential to be haunting for investors because Goldman Sachs (GS) analysts were estimating $3.5 trillion of single-stock and index options expiring on Friday because so many investors have been hedging into the Fed meeting. However, it turned out to be a non-event as the Cboe Market Volatility Index (VIX) fell further, dropping below 24, while stocks rallied.

While the VIX fell, the S&P 500 (SPX) climbed. The SPX climbed to 01.17%, clearing its February highs around 4,400, breaking above its 50-day simple moving average (SMA), and testing its 200-day SMA. The SPX has had a good start at breaking some difficult technical levels of resistance but still has obstacles to clear.

Similarly, the Dow Jones Industrial Average ($DJI) broke above its 50-day SMA, but the Nasdaq Composite ($COMP) closed right on its 50-day SMA. On the other hand, the Russell 2000 (RUT) small-cap index broke its 50-day average on Thursday and has about 120 points to run before it reaches its resistance at its 200-day SMA.

The rally in the RUT appears to reflect a change in market breadth. The advance/decline line is moving back to its March highs, but the potential change is still early. Nonetheless, these are signs that the recent rally is gaining some breadth. The question is, “Can this rally snowball into something bigger?”.

CHART OF THE DAY: GLASS CEILINGS. The S&P 500 (SPX—candlesticks) tested its 50- (blue line) and 200-day (yellow) moving averages on Friday. The 50-day crossed below the 200-day, which is known as the death cross and is considered a bearish sign by some investors. The New York Stock Exchange (NYSE) advance/decline line (green/red line) has moved higher but is still below the simple moving advance/decline cumulative average (gray line). Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Yen Gets Yanked: The U.S. Federal Reservice wasn’t the only central bank to have an interest rate announcement this week. The Bank of Japan (BoJ) announced on Thursday that it would continue to employ stimulus to help the Japanese economy. Japan hasn’t seen the type of inflation that the United States and much of Europe has experienced. The National Consumer Price Index for Japan was also reported on Thursday and revealed core inflation in Japan grew at the very slow pace of 0.6% and overall inflation is at 0.9%.

The yen depreciated against the U.S. dollar on Friday and has depreciated nine of the last 10 trading days on the spot market. The dollar has been stronger against the yen most of the year and particularly when the Fed started discussing the end of its bond-buying program back in September.

However, the yen and the euro have been oscillating over the last year, but when Russia invaded Ukraine, the yen rallied hard against the euro as investors left the euro for better stability in the yen. However, investors have recently moved back into euros, and the yen has now fallen against the euro in eight of the last nine sessions.

Getting Pounded: The Bank of England (BoE) also met on Thursday and decided to raise its key rate for the third time in a row. The United Kingdom hit a 30-year high for inflation growth in January, and the BoE expects to raise rates further because the Russian invasion could keep energy prices higher. Additionally, the United Kingdom has a tight labor market with its unemployment rate hitting a two-year low of 3.9%. The BoE is hoping that the tight labor market will give them the room to raise rates without hurting the U.K. economy.

In the last few days, the dollar has rallied against the British pound, but the pound has appreciated against the dollar since June 2021. With both the BoE and the Fed looking hawkish, it’s likely that the spot market for the pound and the dollar will move sideways.

Speaking of sideways, the pound and the yen have oscillated sideways over the last year despite BoE hawkishness. However, the pound surged on Friday against the yen and is testing its year-long highs.

Love Loss: The U.S. dollar has appreciated against the basket of currencies in the U.S. Dollar Index most of the year and surged once again in February as Russia invaded Ukraine and investors around the globe looked for the safety of the dollar. However, some countries appear to be drawing up financial borders in response to the war.

On Tuesday, The Wall Street Journal reported that Saudi Arabia is considering accepting yuan instead of dollars for oil. This move could hurt the U.S. dollar’s dominance of the global commodity market. With the sanctions on Russian oil and the addition of Saudi Arabia, two of the world’s top three oil producers may start going through Chinese yuan.

According to Reuters, between G7 and European Union governments, sanctions have tied up $640 billion of Russian foreign currency and gold reserves. In the past, Iran, Venezuela, and Afghanistan have seen similar sanctions although not to this magnitude. The dollar and euro account for 80% of the world reserve holdings and the pound adds another 10%, giving them a lot of power over other countries.

If lines are drawn, then China could find a rush to yuans. However, it’s not certain that China can handle this kind of demand. China is still very protective of its currency and continues to be a big buyer of U.S. Treasuries to help maintain the yuan’s value.

What this all means is that the forex market could see increased volatility as these forces collide off the battlefield.

Notable Calendar Items

March 22: Adobe (ADBE) earnings

March 23: New home sales, General Mills (GIS) earnings, H. B. Fuller (FUL) earnings, KB Home (KBH) earnings

March 24: Durable Goods Orders

March 25: Pending Home Sales

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

Image sourced from Unsplash