LiveWire

The VIX, the "fear index", surged to a level not seen since the pandemic second wave scare in October 2020. A mix of factors are behind the move. The Russia/Ukraine situation is creating tremendous uncertainty. Tightening financial conditions triggered by central banks responding to persistently high inflation is also creating a volatile environment as markets attempts to re-price financial assets. The escalation in geopolitical conflicts and the withdrawal of monetary support is a cause of high uncertainty, and weighing heavily on markets, in what is now a depressed momentum for most asset classes, excluding commodities and some safe-heaven assets.

Russian military operation launched on Thursday morning aimed to demilitarise Ukraine caused severe risk aversion across financial markets. European stocks lost 4% at the open before recovering slightly. Futures point to a further 2% loss for US stocks. Investors fear the Russian invasion will trigger more draconian Western sanctions that should not only hurt Russia, but could potentially hurt Western supply chains. With record commodity prices already hurting the bottom line of many companies, investors worry sky-high raw material prices will create a prolonged period of inflation, which in turn will push central banks to continue monetary tightening for longer. On the flip side, while investors may be tempted to de-risk their portfolio, history suggests that stocks typically bottom within a few days before or after the start of war. 

Supply-demand imbalances and geopolitical tensions have pushed commodities prices to record highs. With price pressure looking set to continue well into 2022, the tendency is for companies to raise prices to curb costs increase. Consumer staples particularly face challenges of having to rise prices to pass along the increase in raw materials to consumers, just to keep up with the same profitability. On the flip side, some sectors such as banks and commodities, driven by oil and gas, metal, and mining, can benefit from inflation and tighter financial conditions. 

Home Depot (HD) posted solid earnings yesterday, beating EPS and revenue expectations for the seventh consecutive quarter. Though stock fell nearly 9% as growth is bound to decelerate. HD was considered among COVID beneficiaries as the COVID accelerated forward demand into 2020 and 2021. However, these business are expected now to suffer an overhang for the next few years. Rising interest rates also look to pose additional threat to future demand as investing in home improvement projects become costly. Therefore, "housing stocks" could perhaps continue to see pressure for some time. 

With the focus on the East Ukraine situation, a wall of worry is cementing on the risks of escalating geopolitical tensions which could turn into a longer-lasting conflict. Perspectives of central banks tightening has been taken into account by markets since the start of the year. Nonetheless, the wall of worry does leave room for the market rhetoric to potentially gradually shift a more encouraging one.