Globally, stocks sold-off as oil prices surged nearly 25% last week. Unsurprisingly, European stocks bore the brunt of the sell-off with the MSCI Europe USD index down a steep 9.6% as the region remains uniquely exposed to Russian energy supplies. The S&P 500 fared much better with the index dropping just 1.3%. The NASDAQ slid 2.8%. The MSCI Russia index tumbled an additional 38.6% last week – leaving the index a whopping 73.7% off its October 25th, 2021 high. The 10-year U.S. Treasury yield fell 12 basis points to 1.73% as investors sought the traditional safe haven asset.
Even without targeted sanctions, a large swath of Russia crude oil supplies have been sidelined, which is leading to a tighter oil market and soaring costs.
The United States may stop purchasing Russia crude oil outright, but it would likely be more of a symbolic move with the U.S. importing just 3% of its crude oil from the region.
The ongoing geopolitical conflict will likely lead to at least several more months of higher inflation prints and could possibly result in a global supply shock if conditions don’t improve. Thus far, these rising risks have yet to deter the Federal Reserve with the central bank on track to hike interest rates by 25 basis points at its meeting next week. The European Central Bank will meet later this week.
Citi’s Global Investment Committee decided to add a 4% portfolio weighting to global natural resources as a defensive hedge. We also reinstated a 2.0% overweight to gold. These additions are being largely funded by a reduction in the portfolio allocation to both European and Japanese stocks. The Global Investment Committee will continue to closely monitor unfolding developments and take actions necessary to adjust to emerging risks and potential opportunities with our tactical investment horizon of 12-18 months.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa stock market indices
S&P 5004,329
(-1.3%index down 1.3% from last week)
DJIAdow jones industrial average33,615
(-1.3%index change down -1.3% percent from last week)
NASDAQ13,313
(-2.8%index change down 2.8 percent from last week)
Treading Carefully
The human impact of war is always, always more important than the financial impact and our thoughts are with those who are caught up in this conflict, including Citi’s employees in Ukraine. If we had to sum up recent market action, it would be that investors are treading carefully as the list of potential headwinds grows. Thus far, U.S. equities have held up well with the S&P 500 essentially flat since the February 24th Russian invasion of Ukraine (this compares to a 16.2% drop in the MSCI Europe USD index and a 52% plunge in the MSCI Russia Index year-to-date). The primary question facing investors is whether the conflict will lead to a lasting impact on commodity prices and a new global supply shock that drags down global economic growth.
We believe there are three factors that investors need to consider: 1) how much do commodity prices rise (oil, natural gas, wheat, etc.) and will it be sustained, 2) how much will inflation be impacted, and 3) how patient will the Federal Reserve be? Commodity markets have been extremely volatile as a result of the conflict with price spikes occurring in numerous commodities ranging from natural gas to wheat. However, none are more visible than the global oil market with Brent crude oil prices briefly rising well above $130 per barrel before falling back to $120 per barrel after German chancellor Scholz pushed back against a ban on “essential” Russian energy imports (see figure 1). Natural gas prices are also up materially.
Figure 1. Intra-day ICE Brent Crude Oil Futures
This graph shows the Intra-day ICE Brent Crude Oil Futures.
Sources: Bloomberg and Citi Global Wealth Investments as of March 7, 2022.
An interesting aspect of the recent spike is that Western nations have not targeted the Russian energy sector and yet prices are still spiking in anticipation of a removal of Russian energy supplies from the global market as private refiners look to source oil elsewhere. Essentially, corporate interest and reputational risk are having an impact despite the current lack of targeted sanctions. It has been estimated that about 4.3 million barrels per day of Russian oil may have been sidelined due to this.
With OPEC+, which includes Russia, signaling that it does not intend to raise output in response to the conflict, a nuclear deal with Iran, which could bring additional supply to the market, being delayed, and alternative sources like Venezuela still under U.S. sanctions, oil prices may remain elevated until either energy production ramps up or markets experience a form of “demand destruction” with consumers pulling back as gasoline prices become prohibitive.
While Europe seems unlikely to support targeted sanction against Russian energy due to its high level of dependence, the U.S. may decide to go it alone and choose to stop buying Russian energy outright. Such a decision would certainly have some effect with the U.S. importing approximately 3% of its crude oil from Russia, but it may be more of a symbolic move than an impactful move with the U.S. still serving as the top oil producer in the world in 2021 and the bulk of its crude oil imports (over 60%) coming from its northern neighbor – Canada (see figures 2 and 3).
Figure 2. Top Oil* Producers Globally (2021)
*Oil includes crude oil, all other petroleum liquids, and biofuel
Thousands of Barrels Per Day
Ranking
Country
2021
Share of World Total
1
United States
18.6
20%
2
Saudi Arabia
10.8
12%
3
Russia
10.5
11%
4
Canada
5.2
6%
5
China
4.9
5%
6
Iraq
4.2
4%
7
United Arab Emirates
3.9
4%
This graph shows the Central Bank of Russia Policy Rate.
Sources: U.S. EIA and Citi Global Wealth Investments as of March 7, 2022.
Figure 3. U.S. Imports of Crude Oil (By Region)
Thousands of Barrels Per Day
Ranking
Country
2021
Percentage of Total Imports
1
Canada
3,728
61%
2
Mexico
591
10%
3
Saudi Arabia
346
6%
4
Russia
209
3%
5
Colombia
177
3%
6
Iraq
145
2%
7
Ecuador
143
2%
This graph shows the U.S. Imports of Crude Oil (By Region)
Sources: U.S. EIA and Citi Global Wealth Investments as of March 7, 2022.
At the very least, rising food and energy prices will likely sustain higher U.S. inflation over the next few months – potentially peaking at a year-on-year rate of 8.5% – a full percentage point higher than it stands today. This uptrend should keep the Federal Reserve on track to raise interest rates by at least 25 basis points (or 0.25%) at its upcoming March 15 and 16 Federal Open Market Committee (FOMC) meeting. Perhaps the Fed eventually takes a pause on raising rates should supply chain issues become more pronounced as a result of the Russia/Ukraine conflict, but for now, the Fed seems undeterred. This provides yet another headwind to risk assets with the Fed embarking on a new monetary tightening cycle into a potential global supply shock and a moderating global economy (see figure 4). It is not our base case that this will lead to a U.S. recession, but we think investors would be wise to at least acknowledge the rising risk and to ensure that their portfolio remains well-balanced and diversified.
Figure 4. OECD Leading Indicators for Major Economies
This chart shows the OECD Leading Indicators for Major Economies.
Sources: Haver Analytics and Citi Global Wealth Investments as of January 2022. Note: Y-axis is truncated at 95 for scaling purposes. For reference, the 2020 low for the U.S. was 95.2, OECD – Europe was 89.0, and China was 82.9.
Portfolio Shifts in a Changing World
Over the next few weeks and potentially months, Citi’s Global Investment Committee will continue to monitor global developments and make changes to its asset class recommendations as needed. Not only in terms of de-risking in certain segments of financial markets if warranted, but also to find potential opportunities that may arise as a result. At our most recent meeting, the Committee decided to add a 4% portfolio position in natural resources stocks with the allocation divided between the world’s largest commodity producing industries (energy, agriculture, metals, etc.) and oil field services. We also reinstated a 2% portfolio overweight to gold. These overweights were largely funded by portfolio reductions in European and Japanese stocks.
Market Indicators
Figure 5: U.S. Stock Market Returns and Select Assets
Index
Weekly Chg change in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
-1.3%
-7.5%
8.7%
1.9%
S&P 500
-1.3%
-9.2%
14.9%
1.5%
NASDAQ
-2.8%
-14.9%
4.6%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
-23 bps
22 bps
16 bps
1.73%
Gold ($/Oz.)
4.3%
7.7%
16.1%
$1,970.7
Oil ($/bbl)
24.9%
50.3%
81.2%
$115.68
❮ Swipe left for more
This table shows returns for various USA equity markets and select assets, in weekly, year-to-date and 12 month changes.
Strong corporate earnings are bolstering the equity market.
Figure 6: International Stock Market Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Global
-2.8%
-10.0%
4.0%
1.9%
Europe
-9.6%
-16.2%
-6.3%
2.9%
Japan
-1.2%
-8.0%
-8.3%
2.3%
Emerging Markets
-2.3%
-7.0%
-13.2%
2.6%
❮ Swipe left for more
This table shows the percent changes of stock market returns for Global, European, Japanese and Emerging Markets, over weekly, year-to-date and 12 month periods.
Sources: Bloomberg and Citi U.S. Wealth Management as of March 4, 2022. Note 1 (Equities): Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce; Oil = West Texas Intermediate crude at Cushing, OK. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is not indicative of future returns. Real results may vary.
The Week Ahead
Figure 7: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
3/8
6:00
NFIB Small Business Optimism
FebFebruary
97.3
97.1
3/8
8:30
Trade Balance
JanJanuary
-$87.3b
-$80.7b
3/10
8:30
CPI YoY
FebFebruary
7.8%
7.5%
3/10
8:30
CPI Ex Food and Energy YoY
FebFebruary
6.4%
6.0%
3/11
10:00
U. of Mich. Sentiment
Mar PMarch
61.3
62.8
This table lists a number of key economic events, analysis reports and forecasts from influential institutions.
Sources: Bloomberg and Citi Global Wealth Investment as of March 4, 2022.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management