Stocks fell this week as global oil prices soared and Ukraine fighting intensifies. All major indices were down with the biggest losses in developed international and emerging markets. This happened despite strong economic data.
Nearly 1.5 million people, mostly women and children, have fled Ukraine. Sanctions on Russian leaders and oligarchs have been put into place and most Russian banks have been kicked off the SWIFT system. So far energy exports have not been sanctioned and banks handling those transactions have not yet been included in the SWIFT blockage.
Of concern to many in the U.S. are high gas prices. OPEC+, which includes Russia, this week agreed to increase production another 400,000 barrels per day in April despite U.S. pleas to Saudi Arabia to produce more. OPEC+ approach is for gradual monthly increases, however members have found it challenging to meet these increases which is another example of damaged supply chains from the pandemic shutdowns. One estimate indicates OPEC+ production is currently about 800,000 barrels per day below this gradually increasing target.
While the U.S. is a net exporter of crude oil, oil is a global commodity and prices are affected by world wide supply and demand. There is talk about sanctioning Russian oil exports, but doing so likely will further increase world prices. Another factor which would help increase supply is if the Iran nuclear deal is revived and sanctions on Iranian oil were lifted. While a senior Biden administration official said “significant progress has been made” in the talks, “a number of very difficult issues remain to be resolved.” The administration is preparing, in conjunction with the International Energy Agency, a release of 60MM barrels from reserves to counteract disruptions to the war in Ukraine. Half of the release will be from the U.S. Strategic Petroleum Reserve. According to the IEA, the release is about 4% of its members’ reserves and will amount to 2 million barrels a day for 30 days. The Biden administration coordinated a 50MM barrels in November along with five other countries to combat rising fuel prices. However, IEA chose not to participate in the November increase after several European countries felt it wasn’t justified.
Job creation was strong in January but this was largely offset by market fears of an acceleration in inflation. First, there were supply chain disruptions from Covid, which are only recovering gradually but now there are disruptions from the war in Ukraine. Ukraine accounts for nearly 25% of world wheat and exports and also exports iron, steel and titanium. Ukraine provides computer programming services across the world. Russia ranks 40th for exports to the U.S., far down the list of countries. In addition to a small portion of U.S. oil products and crude oil, Russia also supplies the U.S. with platinum, titanium, iron, steel and fertilizers.
Treasury yields fell on war concerns with the 30-year bond yield at 2.162% and the 10-Year note at 1.731%. Crude oil soared to $115.34 a barrel and natural gas rose to $4.948 per MMBTUs. The U.S. dollar index rose to 98.50 and gold rose to $1972.50 an ounce.
In the economic numbers:
- IHS Markit released its monthly purchasing manager indices for February. Keep in mind that anything over 50 represents growth and anything under 50 represents contraction:
- US manufacturing PMI rose from 55.5 to 57.3.
- US services PMI rose sharply from 51.2 to 56.5 on falling Omicron cases.
- Mexico manufacturing PMI rose from 46.1 to 48.0.
- Canada manufacturing PMI rose from 56.2 to 56.6.
- China manufacturing PMI rose from 49.1 to 50.4.
- China services PMI fell from 51.4 to 50.2.
- Japan manufacturing PMI fell from 55.4 to 52.7.
- Japan services PMI fell from 47.6 to 44.2.
- Eurozone manufacturing PMI fell from 58.7 to 58.2.
- Eurozone services PMI rose from 52.3 to 55.5.
- The European Union reported that inflation in February was 5.8% from a year ago, up from 5.1% year over year in January.
- The Labor Department reported:
- The U.S. created 678,000 jobs in February and unemployment fell to 3.8%.
- The U.S. still has 2.1MM fewer jobs than in February 2020.
- Hourly wages have increased 5.1% in February from a year earlier.
- First time claims for unemployment were 215,000, down from the prior week’s revised 233,000.
- The 4-week moving average of claims, designed to smooth out volatility, fell to 230,500.
- Continuing claims were largely unchanged at 1.476MM in the week ending February 19th .
- For the full unemployment report go here: https://www.dol.gov/ui/data.pdf .
- The EIA weekly oil report is here: http://ir.eia.gov/wpsr/wpsrsummary.pdf . Also, the EIA reported in the prior week:
- Field production of crude oil was unchanged at 11.6MM BPD.
- Natural gas storage fell 139BN cubic feet and is below the 5-year average at this time of year.
- Baker Hughes reported the number of active oil rigs fell 1 to 521. The number of active natural gas rigs was rose 3 to 130.
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Loren C. Rex, CFP®, MA Erik A Smith, AIF®
Founder / Emeritus President & C.E.O.
269-441-4143 517-795-2025
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.
