For the international securities markets, the Ides of March coincide with a sort of perfect storm, consisting of the concomitance between restrictive monetary policies by the main central banks, abnormal increases in the price of fossil fuels with the consequent resurgence of inflation and the Russian invasion of Ukraine.

The latter took by surprise the insiders convinced that the massing of Russian troops on the border was only a show of strength, instead the situation precipitated when the Biden administration forced the German government to block the Nordstream 2 pipeline, strategic for Russia and always disliked by the US as it would reduce European dependence on their energy supplies. This year, the stock markets had already started correcting in mid-January after reaching technical overbought levels at the end of 2021, due to the increasingly hawkish stance of the central banks.

The subsequent attempt to recover by the indices in mid-February was aborted following the worsening of the Ukrainian crisis that resulted in military operations last week. The absolute unpredictability of short-term geo-political developments suggests using fundamental and technical analysis at present to elaborate a tactical investment strategy to tackle the current complex contingency of the markets. Regarding the first aspect, fundamentals, the consequences of the ongoing war in Ukraine could drastically change investors’ forecasts for the US Fed’s key rate hikes hypothesized this year, from 6-7 already discounted by stock market, to 3-4, as evidenced by the reduction in ten-year Treasury Bond yields, which in a few sessions went from 2.08% to 1.74%. But the real problem is not constituted by the level of base interest rates rising from 0.25% to 1.25% which does not change the situation of economic factors much, but rather the total balance sheet of the FED, which went from 800 billion in 2006 to the current 8 trillion, which explains the financial inflation that led the S&P500 to increase in value by seven-fold in less than 13 years. This surreptitious creation of liquidity is the real reason for the long bullish phase of the stock markets that began in 2009, therefore its timely monitoring is essential.

In fact, the current marked upsurge in cost inflation, mainly energy, could mislead the FED directorate, making it lean towards a drain of liquidity from the credit system, which would have a serious economic impact as well as on the stock markets given the elevated degree of indebtedness in the global financial system. Therefore, if we want to find a moderately positive consequence in the dramatic war scenario facing the markets today, it can only be a temporal shift in expected credit tightening. Subsequently, the Technicals of the stock market indices, not only in the US, have seriously deteriorated, confirming the hypothesis already formulated before the war in the Ukraine, which sees the S&P 500 index oriented towards another low in the technical support range between 4100 and 4200, which in the event of further, probable, geo-political worsening has room below down to 4000 and then 3750, where there is strong technical support consolidated in 2020. For the Euro Stoxx 50 index, the current violation of support at the 3900 level opens the way to the 3600 level. Referring to the USA, this bearish scenario is also supported by the consideration that after four consecutive quarters of quarterly growth in the quarterly earnings of 20% of the companies in the S&P 500 index, the earnings growth forecast for the first half of 2022 is estimated to be 5%, the most modest increase in forecast quarterly earnings since 2009. On the currency front, the relative strength of the Swiss franc is not surprising which, in a few sessions has gained almost 4% against the Euro, while the dollar, confirming its less brilliant underlying trend, has struggled more than expected to achieve the same result towards the Euro. Even the safe-haven asset par excellence, gold, has gradually increased, overcoming resistance at 1’880 dollars an ounce, having reached a high of $1’920 and now appears it could reach technical resistance at 1’980 and then the 2020 high of $2’075.

Nicola Bravetti Data Source: Bloomberg
Data obtained on 02.03 11:00 GMT
“This report cannot – nor can – be considered a solicitation to invest in financial instruments”