FX.co ★ US stock market extends losses due to geopolitical headwinds

S&P500

Omicron stats on February 23

US stocks are in the red amid rising escalation in the Russia-Ukraine conflict.

US main stock indices tumbled on Tuesday. The Dow Jones decreased by 1.4%, the NASDAQ slid down by 1.2%, and the S&P500 declined by 1%.

On Wednesday, Japan's stock market incurred significant losses, while China's stock indices rise by 0.8%.

Crude experienced sharp fluctuations yesterday amid the aggravation of the crisis in Ukraine. Brent Crude reached a new yearly high of $ 99.50. Shortly after, it rolled back to $96.50 - 96.80.

The Russian stock market grew yesterday by 1.5-3.5% on the RTS and MICEX indices. However, the ruble hit the lowest levels against the US dollar and euro, 78 and 89, respectively.

The S&P 500 is trading at 4,305. It is likely to stay in the range of 4,280 – 4,350.

Geopolitical tensions intensified again after the Kremlin recognized the independence of Donetsk and Luhansk People's Republics (DPR and LPR). Putin submitted a proposal to the Federation Council asking it to send troops to the separatist regions. The parliament's upper house granted Putin the right to order a military intervention in Ukraine. Western states bitterly criticized Russia for its decision. Heads of foreign states believe that Russia's intervention in Ukraine had already begun although Putin clarified that he was not sent yet troops into the regions. The meetings between Putin and Biden and later between Blinken and Lavrov were canceled. German Chancellor Scholz halted the launch of the Nord Stream 2 Baltic Sea gas pipeline, the toughest sanction against Russia. Sanctions have been imposed against all deputies of the State Duma of the Russian Federation who voted for the recognition of the independence of the DPR-LPR regions. Their actions led to the violation of the borders and sovereignty of Ukraine. Boris Johnson announced sanctions against Vladimir Putin's close allies Gennady Timchenko and the Rotenberg family. However, sanctions turned out to be not as tough as expected. Perhaps, they will be introduced if Russia invades Ukraine. Putin seems to pay zero attention to sanctions. Despite tensions, he recognized the DPR-LPR regions. At the same time, Russia has already signed agreements on friendship, cooperation, and mutual assistance with the DPR-LPR regions on military assistance. It means that the separatist regions may start a war for the liberation of the territories. If so, Russia is obliged to help them. Ukrainian President Volodymyr Zelenskiy said he would introduce the conscription of reservists for a special period. Yet, he ruled out a general mobilization after Russia moved troops into eastern Ukraine.

Russia has automatically withdrawn from the Minsk Agreements after it recognized DPR-LPR. Putin demanded that Kyiv should recognize Crimea as a part of Russia, the independence of the DPR-LPR regions. Ukraine should also guarantee it will not join NATO military alliance.

The US and EU promised to provide financial and military aid for Kyiv.

Omicron cases hold at a level about 2.5 times lower than the highs of late January. There were 1.6 million cases in the world. Germany posted the highest number - 170,000 yesterday. Russia registered 150,000 new cases.

However, all countries are gradually easing lockdown restrictions. Analysts are predicting the end of the pandemic this year.

As for macroeconomic news, the US consumer confidence index remained at a high of 110 in December.

The US real estate market remains overheated. The report showed an increase in property prices by 18% in December on an annual basis.

Today, the US will unveil a weekly report on the US jobless claims. US new home sales data is due today. Economists anticipate the figure of 800,000 in annual terms. The US will also release the revised GDP reading for the 4th quarter. Analysts expect the reading to total 6.9% in annual terms.

The Russia-Ukraine conflict covers the main headlines in the US media. Biden called Putin's latest decision an invasion of Ukraine. He introduced sanctions on Russian sovereign debt from March 1. Australia, Japan, and the UK pledged to impose sanctions against the Kremlin as well.

The US dollar index is trading at 96.00. It is likely to remain in the range of 95.70 - 96.30. The US dollar is trading flat in anticipation of inflation data. Its trajectory also depends on the development of the Russia - Ukraine conflict.

The USD/CAD pair is trading at 1.2746. It is expected to stay in the range of 1.2600 - 1.2800. The pair is holding at highs. Technical indicators are pointed upwards despite high prices since 2014.

Conclusion: the US stock market is likely to rise. Stocks are now at yearly lows. The US economy is strong. The correction phase has ended. Moreover, for the United States, the risks in the Russia-Ukraine confrontation are low.

Some analysts reckon that Putin's patience with Ukraine is getting thinner. The risks of war between Russia and Ukraine are high. The Ukrainian army has increased its military capacity several times compared to 2014-15 thanks to supplies from the United States and the UK, namely tanks and air fighters. The desire of Ukrainians and Russian citizens of Ukraine to defend their homeland is very strong. The defense will be fierce. Western sanctions are likely to be very tough in the event of Russia's attack on Ukraine. All Russian exports will be banned, which will affect the entire financial system. A long-term war with Ukraine will be very unpopular in Russia. Support of citizens for the recognition of the DPR and LPR regions is much lower than the annex of Crimea in 2014.

Thus, for the Kremlin, the risks in the war against Ukraine are huge. The US and the EU seem to lay a trap. Russia will have no choice but to defend the self-proclaimed regions. Naturally, they will impose more sanctions to weaken Russia's economy. This is why the risks of war remain high.