US Open Note – US stocks remain pressured amid rising geopolitical risks

Geopolitical tensions drive safe-haven demand

Fears of an imminent Russian-Ukrainian conflict rattled the markets on Monday after both the US and the UK have reportedly started to withdraw families from their embassies in Kiev. The increasing geopolitical tensions are driving the current risk-off sentiment, sending investors to seek refuge into the safety of gold and US Treasury bonds, with the yield of the 10-year benchmark moving lower on Monday.

Omicron weighs on Eurozone and UK growth

Eurozone’s services flash PMI reading for January slumped to a nine-month low amid ongoing covid-19 restrictions. On the bright side, the slight easing of supply chain disruptions has helped to bolster manufacturing activity in the currency union. Similarly, the consumer facing business activity in the UK has witnessed a significant slowdown due to the surging Omicron cases, with manufacturers also reporting further weakening in order book growth.

In the FX arena, the US dollar inched higher against a basket of currencies as investors braced for the upcoming FOMC meeting. Meanwhile, the euro and the British pound have witnessed significant losses against the greenback on Monday. However, the worst performer so far has been the Australian dollar, which slipped versus all of its major peers after the large flash PMI miss for January, attributed to ongoing pandemic-related restrictions distorting business activity.

US stocks to extend their decline

In Friday's trading session, the rout in US equities deepened as investors weighed corporate earnings results and geopolitical tensions in Eastern Europe. The S&P 500 and Nasdaq Composite fell by 1.9% and 2.7% respectively, logging their worst weekly drawdowns since March 2020. Defensive stocks such as utilities emerged as the undisputed winners over the past week as investors remain jittery about elevated valuations and the prospects of tighter monetary policy. Looking ahead, with pandemic darlings such as Netflix calling for slower future growth, the rotation towards value-oriented names is expected to persist.

Futures for the major US indices are pointing to further ‘pain’ on Monday. While the ongoing downturn of US stocks appears to be overextended, considering the recent drop of the 10-year benchmark yield from its recent highs, the current tensions in the Russian-Ukrainian border are buoying risk-off sentiment in the markets. Likewise, in Europe, the Stoxx 600 index is in negative territory, while Hong Kong’s Hang Seng index closed 1.24% lower after the region reported its highest covid-19 cases in the past 18 months, diminishing the chances for further economic reopening.

Meanwhile, oil inched lower at the time of writing despite the supply disruption fears amid the rising tensions in the Middle East between the UAE and Yemen’s Houthis which could make an already tight market even tighter at a period where OPEC is still struggling to raise output.

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