US inflation and Ukraine tension continue to spook markets

Current downward trend could offer opportunities for those with longer term view of stocks

A trader works at the New York Stock Exchange. Hot inflation data from the US in January spooked markets with equities selling off. AP

Volatility has remained high in financial markets throughout this month.

US Consumer Price Index data showed last week that overall inflation in the US ticked 7.5 per cent higher in January compared with a year ago.

The hot inflation print spooked markets, with equities selling off and the US dollar catching strong bids last Thursday and Friday.

This sparked rumours that the US Federal Reserve Board may announce a half percentage point move as early as March. However, at the time of writing, the Fed had not announced an emergency increase and is instead maintaining its wait-and-watch stance.

After Thursday’s news, the S&P 500 index continues to trade heavily — at the time of writing, it was trading 2.2 per cent lower on the month. The tech-heavy Nasdaq reported large losses on the month, trading 5.3 per cent lower.

In my previous column, I said that it was unclear if markets had found their bottom. My view remains unchanged. Along with the continuing US inflation theme, developing tension around Ukraine will also continue to rile market sentiment.

At the weekend, US President Joe Biden told his Russian counterpart Vladimir Putin that the “West would respond decisively to any invasion of Ukraine” and since then, the US and UK have called on their citizens to leave the country.

While we hope this story calms down, keep an eye out for any escalating rhetoric, which will cause more downsides in riskier assets.

The US dollar has been catching bids as a result of these themes. The Dubai Gold and Commodities Exchange (DGCX) EUR-USD futures contract is still trading higher, although 1.6 per cent lower than the 1.15 highs on February 10. I expect the currency pair to find strong support at 1.1130 with upsides capped at 1.15 technically.

It was a similar story for GBP-USD on the DGCX; after hitting highs above 1.36, the cable finds itself consolidating above 1.35 levels. The pair should continue to find good buying support at 1.32 levels with upsides capped at 1.3750 this month.

Gold will be an interesting commodity to watch in the weeks ahead. The precious metal broke through $1,850 levels and is on its way to test a three-month high at $1,865.

Fundamentally, gold has benefited from hotter-than-expected inflation and has been supported by the continuing Ukraine tension. Following $1,865, I expect gold to test June 2021 highs of $1,917 next month.

Looking ahead to the rest of this month, I am keeping an eye out for US gross domestic product data due on February 24. Quarter-on-quarter growth is expected to come in at 7 per cent during the fourth quarter, up from 6.9 per cent during the same period in 2021.

ISM data scheduled for March 1 will offer a good gauge on the current state of manufacturing activity in the US, before we turn to February’s non-farm payrolls job report due on March 4.

Across the pond, manufacturing and services PMI for the eurozone is due on February 21, while inflation data is scheduled for February 23. Inflation in the eurozone is expected to have slowed to 5 per cent in January from 5.1 per cent during the same period a year ago.

It might be vigilant to adopt a wait-and-watch approach to financial markets in the weeks ahead — particularly for those looking for intraday opportunities.

The current downward trend could provide opportunities for those who have a longer-term view of stocks and need to bring down their average entry prices in certain equities.

However, I don’t think we have seen the end of this current downward channel. Expect volatility to remain rife in the weeks ahead.

Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures