Last night, Russia continued its invasion of Ukraine by attacking several cities and airports with missile strikes. Oil futures spiked overnight with WTI crude rising 8% and trading just shy of $100 per barrel. Brent crude futures rocketed up 7.8% to $101.50. Natural gas futures also shot up 6.31%. The rising oil prices and escalation by Russia will have an effect on equities.
Nasdaq futures were down the most before the opening bell at 3.21%, followed by the S&P 500 futures at 2.51% and Dow Jones Industrial futures at 2.38%. If the sell-off holds, the Nasdaq Composite will likely be in bear market territory as it reaches 20% below its November high. The Cboe Market Volatility Index (VIX) shot up more than 20% to 37.38, reflecting the rising fear and uncertainty around the invasion.
Asian markets closed sharply lower on the news with the Hong Kong’s Hang Seng falling 3.2%, the South Korea KOSPI falling 2.6%, and the Japanese Nikkei dropping 1.8%. European markets are also getting hit as the STOXX 600 dropped 3.8%, the German DAX fell 5.1%, and the French CAC 40 decreased 4.5%.
Investors are looking for safe havens with gold futures climbing more than 3% overnight and the 10-year Treasury yield falling 5.41% as investors buy up Treasuries and push bond prices higher. Currency traders are piling into the dollar, pushing the U.S. Dollar Index up more than 1%.
The Russian occupation of Ukraine, along with warnings from the U.S. State Department that Russia is poised to take over the entire country, pushed stocks lower once again on Wednesday. The S&P 500 broke an important support level by trading below 4,300. This level held in January of 2022 and October and July of 2021. Depending on which technical analyst you talk to, the next level of support could be between the 4,050 to 4,000 range.
The MOEX Russia stock index was down 34% this morning in response to the attack. On Monday, the MOEX was down 20%. Russian ADR Mobile Telesystems (NYSE:MBT) fell 8.79% on Wednesday. Other commodities where Russia is big player are also rising. Palladium futures spiked 10% overnight, adding to yesterday’s gains of 3.70%. Russia is the largest producer of palladium. Russia is also a big player in nickel, and those futures were up more than 5% before the bell, adding to its 1% rise on Wednesday.
The troubles may not be just with Russian companies. President Joe Biden announced new sanctions on Switzerland-based company Nord Stream 2 AG, which built the Russian Nord Stream 2 gas pipeline. If the United States and its allies are willing to target Russian companies specifically, Russian stocks will likely struggle.
The Dow Jones Industrial Average also broke support but is trading just below its June 2021 low. However, the average will likely be weighed down by the S&P 500 if it continues to slide on Thursday. The NASDAQ Composite is testing its May 2021 low and is moving into an area of congestion between the 13,000 and 12,000 levels. While value stocks fared better than growth stocks, the S&P 500 Pure Value Index still fell more than 1%. The S&P 500 Pure Growth Index dropped 2.56%. The energy sector was the only sector to finish the day in the positive. Consumer discretionary and technology were the worst-performing sectors on the day.
Earnings Under New Lens
This morning, there are a couple earnings announcements of interest that may have poor market reaction based on the Russian invasion more than the actual results. For example, tech stocks are likely to get hit as investors continue to shy away from growth stocks and favor safer harbors. NetEase (NASDAQ:NTES) was down 33.4% in premarket trading despite beating on top and bottom line numbers. NTES is one of China’s leading internet and online gaming providers. It has been hit hard by a crackdown from the Chinese government because it thinks its citizens are spending too much time playing video games.
However, commodity companies like Newmont Goldcorp (NYSE:NEM), which is a leading producer of gold, may find greater strength under the current conditions. NEM is up 2.56% in premarket trading after beating on earnings and revenue and with rising gold prices.
The move to safe havens has the potential to benefit consumer staples companies because they tend to be more defensive. Anheuser Busch (NYSE:BUD) beat on earnings and revenues, but Keurig Dr Pepper (NASDAQ:KDP) missed on earnings despite beating revenue estimates. So far, neither company looks to be getting a boost. BUD was down 4.95% before the bell, while KDP was down 2%.
After Wednesday’s close, eBay (NASDAQ:EBAY) announced earnings that came right in line with earnings estimates but offered a more conservative earnings outlook that missed analyst expectations. The stock fell more than 9% in extended-hours trading.
Booking Holdings (NASDAQ:BKNG) rallied 2.84% in after-hours trading on better-than-expected earnings and revenue. The company also offered a more positive outlook, saying that it’s seeing “meaningful improvement” on travel trends as Omicron cases continue to fall. However, the Russian invasion appears to have investors thinking about other travel risks because the stock was down 7.3% in premarket action.
Staying with the travel group, Hertz Global (NASDAQ:HTZ) announced a new record profit. This allowed HTZ to beat on earnings estimates but fell short on revenue. The miss on revenue took the stock down about 4% in after-hours trading. Many investors are concerned about the future of all rental car companies. Because of the shortage of new cars during the pandemic over the last two years, rental car companies haven’t been able to replace their vehicles. This means an enormous amount of spending is in the future for these companies.
While people may not be traveling as much, they don’t seem to be afraid to go to the movies. IMAX (NYSE:IMAX) announced better-than-expected results on top and bottom line numbers. The stock rallied 7.8% after the bell but pared its gains by morning with shares trading 2.67% higher before the opening bell.
CHART OF THE DAY: LEISURELY LOOK. The Dow Jones U.S. Travel & Leisure Index (DJUSCG—candlesticks) has started outperforming the S&P 500 (SPX—pink) and has exhibited relative strength (green) over the S&P 500 starting back in November. The Dow Jones U.S. Hotels Index (DJUSLG—red) has grown more than 17% in the last six months. However, the AMEX Airline Index (XAL—blue) has fallen more than 7%. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Sleep Over: The positive earnings announcement from Booking Holdings (NASDAQ:BKNG) may help travel and leisure stocks on Thursday, but the group is facing an uphill climb after the Dow Jones U.S. Travel & Leisure Index fell nearly 3% on Wednesday. With that said, the sector has begun to demonstrate relative strength against the S&P 500 and appears to be led by the hotels group.
The Dow Jones U.S. Hotels Index doesn’t appear to have suffered the same problems that the airline group has with COVID-19 and its variants. In fact, Marriott International (NASDAQ:MAR) soundly beat earnings and revenue estimates last week, which helped the stock create a new all-time high. Unfortunately, large hotel chains, particularly those with high international exposure like Marriott, are likely to get hit today because of the geopolitical risks.
Sky Falling: It almost goes without saying that airlines have underperformed the S&P 500 as well. Fewer travellers weren’t their biggest problems with Omicron; they were hit hard by workers getting sick. Airlines had to cancel flights due to a lack of pilots, attendants, mechanics, baggage workers, flight attendants, and more.
With that said, the AMEX Airline Index has gained in relative strength against the S&P 500, but it will likely see new troubles with rising fuel prices caused by rising oil prices due to the Russian invasion of Ukraine. Airlines look to be coming out of one pocket of turbulence and into another.
Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.