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Epic turnaround: the Nasdaq Composite entered bear market territory, then revered, turning a 3.5% loss into a gain of 3.3% for the session. The S&P 500 also rallied off its lows to rise 1.5%, the Dow Jones rose 0.3% and small caps Russel 2000 managed a gain of 2.6%. European markets have bounced this morning, taking their cue from Wall Street and largely positive session for Asia. Russia’s MOEX +20% this morning and RTSI +25%…relief all round. Oil prices also fell sharply from yesterday’s highs as Brent topped $105 before sliding under $98. This morning it’s back up at $101 or so. Wheat is back down a bit after hitting its highest since 2008, gold closer to $1,900 after spiking to $1,975 yesterday. The USD is gaining a bit of ground this morning though as risk mood remains very much on edge…Russia does not seem to have done as much in its first day as it would have hoped and fears grow for more protracted, bloody battles ahead. 

 

Reasons for the turnaround? Chiefly we can say that markets sold off aggressively early yesterday on fear – fear of sanctions rather than a fear for the future of Ukraine. The absence of any sanctions on Russia oil and gas, and decision to not exclude the country from the Swift payments network left the market breathing a sigh of relief as to the global economic impact the invasion might have. This can be neatly evidenced by the sharp drop in oil from its highs and the turnaround for Visa and MasterCard during the session. Everyone knows the sanctions don’t go far enough, but everyone knows going much farther will mean a lot of pain for Europe.

 

President Biden said cutting Russia off from Swift is “always an option, but right now, that’s not the position that the rest of Europe wishes to take”. Germany, Italy, Cyprus and Hungary seem to be pushing back hard against this idea. The G7 issued joint statement that Putin “has put himself on the wrong side of history”. Ukraine’s President warned Russia is planning to assassinate him. 

 

Situation on the ground remains fluid but seems Ukrainian army is fighting hard and holding the Russians back. Russia failed to take a key airport near Kiev yesterday but it’s clear their tanks are rolling into the Obolon district of the capital this morning.  

 

It’s sad to say the market does not care particularly about the plight of Ukrainians. We could also say that the market looked oversold and buy the dip still pervades…many think invasion is the time to be buying not selling. Haven bid for bonds keeping yields down may also be a temptation for investors looking at beaten-down tech names. There was a bit of baby and bath water too; mega cap tech charged higher (AMZN +4.5%, MSFT +5%, GOOG +4%) as traders thought these were too much a part of indiscriminate selling. Tail risks are subsiding – the full-scale invasion was the tail risk…plus systematic selling is exhausted, buybacks are now coming (megacap tech leading with huge cash piles) so the flow dynamics mean dips keep finding a floor and rallying. However, the same problems of rich valuations and excessive leverage meeting a proper Fed tightening cycle remain. Sell the rip seems to be the order of the day, with half of the S&P 500 in bear market, three-quarters of the Nasdaq. “Fed tightening into crash & stagflation, credit/stock bear markets beginning” – BofA’s Michael Hartnett. 

 

There were just over 1,100 new lows on Nasdaq on the open vs 1,755 in late January, also no Vix new high on the cash equity open…lots of traders taking profits from their hedges and unwinding as peak uncertainty passes. Look for 4,200 on the S&P 500 – the 23.6% retracement of the move up from the March 2020 low to the Jan ‘22 highs…break here calls for test of next Fib level at 3,800. This area held yesterday.  

 

It’s hard to get a real handle on where we are right now – the market reaction reflects wide range of potential outcomes, ie uncertainty over what happens on the ground as well as sanctions. Truth is most market participants are not experienced in what we face today: War + inflation…this is late 70s/early 80s type territory. Big question right now is whether central banks slam the brakes on their nascent hiking cycles. This could give some relief to tech/growth but could unleash further inflation pressures on the demand side, adding to the increasing cost-push supply side inflation we are encountering.  Certainly we saw some small bid for tech/growth yesterday emerge as traders backed into some stocks that have really taken a bit of a pounding on the inflation-hiking narrative we’ve been seeing YTD.  

 

Inflation…the invasion is a big negative for anyone who thought that inflation has peaked. Surging oil and gas prices show no signs of slowing…ECB Governing Council member Gabriel Makhlouf said the central bank was likely to agree on a faster wind-down of asset purchases at its March meeting but agreement on when to raise rates are less clear. ECB’s Holzman said war could slow down tightening, keep QE going longer. Yields have come off as bonds found some haven’t bid on the Russian attack, but traders are not pulling their tightening bets just yet with market pricing still pointing to 6 hikes this year by the Fed and 5 by the Bank of England. Just the one for the ECB. What I would say is that the very aggressive, 50bps type chatter has died down a lot since Russia escalated. The Fed will be treading a bit more carefully again. It will probably be ok with that and can blame inflation on Russia. But it will still be hiking. Core PCE inflation figures due at 13:30 GMT today. 

 

Companies 

 

Avast FY ‘21 results showed billings at $948.4m up 2.9% at actual rates, with organic growth of 4.3%. Revenue at $941.1m up 5.4% at actual rates, with organic growth of 7.5%. Consumer Direct Revenue at $811.2m, up 11.1% at actual rates, with organic growth of 9.4%. Adjusted EBITDA up 4.5% to $517.6m, whilst margins down 50bps at 55.0%. Shares flat at the open. 

 

Pearson shares +9% as it reported underlying sales growth of 8%, helping send adjusted operating profit up 33% to £385m. Sales growth was led by Assessment & Qualifications (+18%), driven by 19% growth in Professional Certification (VUE) with OnVUE continuing to benefit from growth in the IT sector. US Student Assessment +17% and Clinical Assessment +30%. Management noted that profit growth was driven operating leverage on revenue growth and cost savings offsetting both cost inflation and investment in future growth. 

 

Rightmove +4% as it reported year-on-year revenue growth of 48% in 2021, +5% on 2019 levels. Operating profit of £226.1m for the full year was up 6% on 2019 (2019: £213.7m) and up 67% on 2020. The company also declared a final dividend of 4.8p per share, taking the total dividend for 2021 to 7.8p per share. 

 

Tesla: The SEC has started investigating whether stock sales by Elon Musk and his brother Kimbal Musk broke insider trading rules. If you recall, Kimbal sold $108m in stock a day before Elon carried out a Twitter poll asking followers whether he should offload 10% of his stake in the company. Musk has been talking tough, accusing the SEC of a witch hunt. He says Kimbal had no idea about the poll. I think the bigger question is whether Musk dumping his stock at the top and saying ‘twitter made me do it’ is more of a scandal.

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