Stocks and U.S. equity futures slid Monday, while havens including sovereign bonds rose, amid fears of an inflation shock in the world economy as oil soared on the prospect of a ban on Russian crude supplies.
S&P 500 contracts fell 1.5%, those for the Nasdaq 100 some 2% and European futures about 3%. An Asian stock index was on course for a bear market — a drop of more than 20% from a February 2021 peak. Brent oil hit $139 a barrel, and West Texas Intermediate $130 a barrel, before trimming some of the rally.
Secretary of State Antony Blinken said Sunday the U.S. and its allies are looking at a coordinated embargo following Russia’s invasion of Ukraine, while ensuring appropriate global supply. High energy prices threaten to stall global growth, a risk that is sending tremors across markets.
Grains, metals and energy have surged on concerns of supply disruptions due to the invasion and sanctions on Russia that are turning the commodity powerhouse into a global pariah. Palladium and copper hit all-time highs.
The euro sank — dropping to parity against the Swiss franc for the first time since 2015 — on concerns about the economic outlook for Europe, which relies on Russian energy. Sovereign bonds and the dollar advanced, with the U.S. 10-year Treasury yield falling below 1.70%, while gold touched $2,000 an ounce.
The global economy was already struggling with high inflation due to pandemic-era snarls. 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.
“For the U.S. economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war,” Ed Yardeni, president of Yardeni Research, wrote in a note. “For stock investors, we think 2022 will continue to be one of this bull market’s toughest years.”
Fed Bank of Chicago President Charles Evans said Friday the central bank should increase interest rates to close to its “neutral” setting this year, implying as many as seven quarter-point hikes. Markets are pricing in about five such moves in 2022.
‘Stagflationary Shock’
“Central banks are facing an exogenous stagflationary shock they cannot do much about,” Silvia Dall’Angelo, senior economist at Federated Hermes, wrote in a note.
In Russia, President Vladimir 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. Sanctions will determine if international investors are able to collect payments, the Finance Ministry said.
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.
The Swiss franc, a bolthole in times of stress, retreated against the dollar after a governing board member of the Swiss National Bank said it’s ready to intervene to tackle rapid strengthening.
The worries about the war overshadowed China’s signal that more stimulus is on the cards after officials set an economic growth target that topped forecasts. Premier Li Keqiang vowed at the opening of the National People’s Congress to take bold steps to protect the economy as risks mount.
