Aurelia Butler

NEW YORK (Reuters) – A U.S. stock market, already on edge from a hawkish Federal Reserve and a conflict between Russia and Ukraine, now has another worry: higher oil prices. U.S. crude prices stand at around $91 a barrel after surging some 40% since Dec. 1 and earlier this week touched their highest level since 2014. Prices for Brent crude, the global benchmark, have also soared and are near 7-year highs. Rapidly rising oil prices can be a troubling development for markets, as they cloud the economic outlook by increasing costs for businesses and consumers. Higher crude also threatens to accelerate already-surging inflation, compounding worries that the Fed will need to aggressively tighten monetary policy to tamp down consumer prices. “The stock market would really run into trouble if we went north of $125 per barrel and stayed there for a while because that would overheat high levels of inflation,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “That means that the Fed would have to be a lot more aggressive and that certainly would not be a pleasant scenario for the stock market.” Rising tensions between Russia – one of the world’s largest oil producers – and Ukraine recently helped drive the rally in oil, which had been supported by a recovery in demand from the coronavirus pandemic. Capital Economics analysts said earlier this week that crude oil and natural gas prices would surge if the conflict in Ukraine escalated “even if they fall back relatively quickly as the dust settles.”Elevated oil prices contributed to the rise in U.S. inflation, which grew at its fastest pace in nearly four decades last month: While overall consumer prices rose 7.5% year-over-year in January, the index’s energy component rose by 27%. Each “sustained” $10 increase in the price of oil per barrel adds about 0.3 percentage points to the overall consumer price index, on a year-over-year basis, according to analysts at Oxford Economics. “The largest impact of higher oil prices is on consumer price inflation and it adds further to the pressure for the Fed to be more aggressive,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said in emailed comments to Reuters. The benchmark S&P 500 is down over 8% this year while the yield on the benchmark 10-year Treasury note has risen by 40 basis points to over 1.9%. Investors are pricing the Fed funds rate to rise to above 1.50% by the end of 2022, from near zero now, according to Refinitiv’s Fedwatch tool.CONSUMER SPENDING IMPACTRising crude is already raising costs for businesses and drivers. The national U.S. average for gasoline recently stood at $3.48 a gallon, automobile group AAA said earlier this week, up 18 cents from a month earlier and 98 cents from a year ago.As gasoline prices rise, investors are monitoring trends for consumers, whose spending accounts for over two-thirds of U.S. economic activity. Data on Wednesday showed U.S. retail sales increased by the most in 10 months in January, but last week’s consumer sentiment reading came in at its lowest level in more than a decade in early February. “The risk is that if gas prices at the pump start going up that means less discretionary spending for consumers at a time when a lot of their fiscal benefits from the last couple years are fading,” said Michael Arone, chief investment strategist at State Street (NYSE:STT) Global Advisors. Investors are gauging the effect of higher oil on companies’ earnings. Typically, rising oil prices are estimated to lift overall S&P 500 earnings by about $1 per share for every $5 increase in the price of crude, according to David Bianco, Americas chief investment officer at DWS Group, with benefits to energy firms outweighing the drag on earnings of airlines and other companies potentially hurt by higher crude costs. That amounts to about 0.4% of total S&P 500 earnings expected for 2022.The S&P 500 energy sector is up 22% so far in 2022 while fund managers in the latest BofA Global Research survey reported their highest allocation to energy stocks since March 2012. But with oil prices already near seven-year highs, and energy stocks comprising a far lower share of the market than a decade ago, those slim bottom-line benefits may be overshadowed by inflation worries if crude keeps charging higher, some investors said.”Higher oil prices, without a recession, raise S&P profits,” Bianco said. “But not as much as it used to and you definitely don’t want this happening when the Fed is fighting inflation.” More

Speaking at a White House press briefing, deputy national security adviser Daleep Singh also argued that Russia would be unable to replace technology imports from other countries, including China, if the United States imposes tough export controls it has also threatened against the country.”We are converging on the final package,” he said. “All options remain on the table but its probably not going to be the case that you’ll see SWIFT in the initial rollout package,” he added. His comments confirmed a Feb. 11 report by Reuters. Tensions are running high on the Ukrainian-Russia border after Russian-backed separatists announced an evacuation on Friday from breakaway regions in east Ukraine in a conflict the West believes Moscow plans to use as justification for an invasion of its neighbour. Russia denies it plans to attack. The United States has repeatedly threatened tough sanctions against Russia if President Vladimir Putin invades Ukraine, but questions remain about the scope and ordering of potential measures that have been floated by the Biden administration. The sanctions on the table also include export controls on components produced by Russia for the tech and weapons sectors, and sanctions against specific Russian oligarchs. More

Two top Federal Reserve officials said the US central bank should launch a steady string of interest rate increases beginning in March, in a bid to damp demand and bring down inflation.Lael Brainard, a Fed governor who has been nominated to serve as its vice-chair, said on Friday that it would be appropriate for the central bank to “initiate a series of rate increases” beginning at its meeting next month. Financial markets were “clearly aligned” with that move, she added.Brainard’s comments, delivered at an event hosted by the University of Chicago Booth School of Business, echoed those from John Williams, president of the Federal Reserve Bank of New York, earlier on Friday. At an event hosted by New Jersey City University, Williams said he supported the Fed “steadily” raising interest rates from their current near-zero levels starting next month.“With today’s strong economy and inflation that is well above our 2 per cent longer-run goal, it is time to start the process of steadily moving the target range back to more normal levels,” he said.As members of Fed chair Jay Powell’s inner circle, Brainard and Williams’ views carry significant weight as senior policymakers engage in a heated public debate about what the central bank needs to do to counter inflation.Their latest guidance comes amid substantial uncertainty about the pace at which it should be moving away from the ultra-stimulative monetary policy settings that have been in place for two years since the onset of the coronavirus pandemic. Williams told reporters that he does not see a compelling argument for a “big step” in March, but said the tightening process should occur faster than last time, when the Fed first adjusted in December 2015 and then waited a year to deliver a second quarter-point increase.James Bullard, president of the St Louis Fed and voting member on the Federal Open Market Committee, has been one of the most vocal advocates for “front-loading” the interest rate increases. He has called for the federal funds rate to be 1 percentage point higher from its near-zero level by July.Bullard has also previously signalled his support for a larger than usual half-point interest rate rise next month — although he said he would defer to Powell on the issue.Several Fed officials have pushed back on the need for such a move, including Esther George of Kansas City and Loretta Mester of Cleveland. Mary Daly of San Francisco has instead called for a “measured” approach to lifting the fed funds rate to a level consistent with slower economic activity.Market expectations for a half-point interest rate increase in March dropped substantially on Friday after Williams spoke, suggesting investors have revised their view on how aggressive the Fed will be. Roughly six quarter-point increases are pencilled in for this year.Williams acknowledged that inflation, which has reached its fastest pace in four decades, was hovering at a level that was “far too high”, and said monetary policy had an “important role to play” in helping to tame it.“Demand for goods and some services is now far outstripping supply, resulting in elevated inflation,” he said. “With the labour market already very strong, it’s important to restore the balance between supply and demand and bring inflation down.”

Divisions within the Fed are even sharper over the balance sheet, with some officials making the case for outright asset sales of agency mortgage-backed securities and others preferring a more methodical reduction by no longer reinvesting the proceeds of maturing securities. The Fed has not yet specified when the process will begin and how quickly they will proceed.Brainard said it would be appropriate for the Fed to begin reducing its $9tn balance sheet “in coming meetings”, while Williams said the Fed should do so “steadily and predictably”, starting later this year.“Taken together, these two sets of actions — steadily raising the target range for the federal funds rate and steadily bringing down our securities holdings — should help bring demand closer to supply,” he said.Williams’ comments followed remarks from Charles Evans, president of the Chicago Fed, who said at the same Chicago Booth event that the current inflation situation warrants a “substantial repositioning of monetary policy”. But very restrictive interest rates may not be necessary, he added, translating to a “smaller risk” to jobs and growth. More

Exports of Mexican avocados to the US will resume after a threat to a US inspector resulted in a temporary halt to inspections, cutting off Americans’ primary supply of the popular fruit. The US Department of Agriculture’s Plant Health Inspection Service on Friday said it had enacted additional measures to keep its inspectors safe after one individual received a threat on February 11. Inspections and exports will resume immediately, the US agency said. The US’s halt to inspections of avocados last week came during peak growing season and just before the Super Bowl — one of the days with highest demand as viewers traditionally feast on guacamole while watching the American football championship. The halt was ordered after a US inspector received a threatening phone call, Mexico’s foreign ministry said in a statement, though few details have been made public.Michoacán is the only Mexican state with a licence to export avocados to the US. It has been rocked by extreme cartel violence in recent years. Its 2021 homicide rate was 56 per 100,000 people, according to government data, more than double the national average.Avocados — known as “green gold” — have become one of Mexico’s most valuable agriculture exports as US per capita consumption has soared. In 2021, the US imported $3bn worth of avocados, with more than 90 per cent of that coming from Mexico, according to the USDA.The dispute over avocados comes at a time of heightened trade tensions between the neighbouring countries over issues ranging from proposed US electric vehicle subsidies to a Mexican plan to concentrate the electricity market and lithium production in state hands.Since last week’s suspension, US officials, Mexican state and federal governments and the producer’s association held talks to try to reach a deal on how to keep US inspectors safe.Michoacán Governor Alfredo Ramírez Bedolla on Thursday said he proposed an independent intelligence group within the avocado producers, packers and exporters association, in addition to a security unit made up of National Guard and state security officials. The industry generates some 300,000 jobs in the state, he said.Kenneth Smith Ramos, who was Mexico’s chief negotiator for the US, Mexico and Canada trade deal and is now a partner at trade consulting firm Agon, said Mexican authorities and industry had acted quickly. He said he hoped there had been lessons learned from this experience that could apply to other crops too.“It is a serious issue because you start seeing a spilling over of the security problems that Michoacán has,” he said. “It is something that should put up a red flag in Mexico in terms of making sure that there is proper co-ordination at all levels of government.” More

NEW YORK (Reuters) – After a turbulent start to the year, investors are betting stock market volatility isn’t going away anytime soon. While tensions between Russia and Ukraine have been the most recent driver of stock market gyrations, many expect inflation, uncertainty over monetary policy and stretched valuations to keep stirring asset prices this year, even if geopolitical fears subside.The Cboe Volatility Index, often called Wall Street’s “fear gauge,” recently stood at 29, some 11 points higher than its historical median. Volatility futures at least eight months out show markets pricing increased stock market gyrations for much of the year.Some 78% of U.S. investment professionals responsible for fund selection and portfolio construction anticipate a rise in stock market volatility in 2022, according to a recently released Natixis Investment Managers Survey.”This is not just Ukraine … investors understand that this is not going to be an easy year, ” said Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, which provides risk mitigation strategies for institutional investors. Plunging stock markets in the wake of COVID-19 shattered a long period of placid trading and took the VIX to an all-time high of 85 in March 2020. While the VIX has retreated as stocks more than doubled from their lows, it has not closed below last decade’s median level of 15 in more than two years, one of several signs pointing to expectations of more market swings to come.”We don’t necessarily see new post-COVID lows for the VIX anytime soon,” said Max Grinacoff, equity derivative strategist at BNP Paribas (OTC:BNPQY), who has been recommending strategies such as put options spreads, which are designed to offer protection against volatility. The S&P 500 is down 8% this year after rising 27% in 2021, while yields on the 10-year Treasury are up about 42 basis points year-to-date in anticipation that the Federal Reserve will tighten monetary policy as it fights to tamp down inflation. The gyrations haven’t been confined to stocks. The ICE (NYSE:ICE) BofAML U.S. Bond Market Option Volatility Estimate Index – a one-month measure of expected volatility in Treasuries – stands near two year highs, while corporate bonds have also slid. Elevated stock market valuations pose another danger if volatility persists, investors said. The S&P 500’s price-to-earnings ratio on a forward 12-month basis stands at 25.5, a 38% premium to its 20-year average, according to Refinitiv Datastream. The elevated valuations could make stocks more vulnerable to bad news, potentially increasing volatility, said Patrick Kaser, portfolio manager at Brandywine Global Investment Management.”Anything less than an orderly outcome is almost certainly a downside scenario for equities,” Kaser said. Kaser is favoring stocks and sectors he believes will be comparatively less volatile, including chemicals, banks and healthcare. Meanwhile, Goldman Sachs (NYSE:GS) analysts recommended investors buy call options, which target higher prices, on interest rate sensitive stocks including financials like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).”Higher interest rates have been a key driver of equity market volatility in recent weeks,” they wrote in a report earlier this week. “We believe it is important for investors to have rate-reactive instruments in their financial toolkit.”Not everyone believes higher volatility will persist. Analysts at JP Morgan said on Friday that markets have likely priced in monetary policy and inflation risks. They recommended investors buy bearish put options on the VIX that would increase in value if the index fell by July, a seasonally quiet period for volatility.Others however, are betting calm won’t return anytime soon.”I would be expecting still some months of volatility for all risky assets,” said Antonio Cavarero, head of investments at Generali (MI:GASI) Insurance Asset Management in Milan, told the Reuters Global Markets Forum on Thursday. “I probably am a bit more confident in the second part of the year, but from now until then, it probably is going to be a choppy ride,” he said. (This story refiles to fix spelling error in headline, no change to content of story) More