S&P 500 climbs above 4,300 despite ongoing fighting in Ukraine

• US stock markets took advantage of Thursday’s surprise intraday rally to push higher on Friday despite intensified fighting in Ukraine.
• The West’s soft sanctions response plus the US stock market’s strong track record of overcoming geopolitical uncertainty are helping.
• The S&P 500 rose 1.9%, the Nasdaq 100 1.2% and the Dow 2.2%.

Despite the intensification of the fighting in Ukraine, US stock markets they have built on Thursday’s historic intraday rally from Friday and look set to end the week at highs. The S&P 500 Index, which tested 4,100 on Thursday, is now trading at the 4,370 zone, up 6.0% from previous weekly lows and up 1.9% on Friday’s day. The rebound of the past two sessions means the S&P 500 Index is, for now, out of “correction” territory, meaning it is less than 10% below its all-time highs from early January.

Traders/market commentators have attributed a variety of factors as driving the rally. First, after the initial panic following Russia’s abrupt invasion of Ukraine on Thursday, it quickly became clear to many that the EU and US would not implement sanctions on Russian energy exports for fear of inflicting economic damage. As long as it remains that way, that reduces some of the stagflation risks associated with the Russo-Ukrainian war. Others have cited the fact that major geopolitical events in the past have not had a lasting impact on US equity valuations, meaning there has been plenty of demand to buy on dips.

US economic data on Friday was strong, with personal income and spending metrics for January beating expectations and durable goods orders over the same period also seeing strong growth, suggesting economic resilience despite of the high prevalence of Omicron in January. Economic optimism combined with the fact that the latest core PCE inflation report (also for January) was largely in line with expectations is likely to contribute to the rally.

The latest inflation figures were not seen as adding to the risk of the Fed’s 50bp rate hike in March, with 25bp now the base case amid new geopolitical uncertainties. This uncertainty was mentioned several times in the Fed’s last Semi-Annual Monetary Policy Report and has been mentioned several times by policymakers in the last two days. Although hawkish Fed members James Bullard and Christopher Waller seem interested in a 50bp move in March, most other Fed members sounded more cautious.

Looking at the other major US indices; The Nasdaq 100 index was up over 1.0% and, likely to the disappointment of bears, made a convincing break north of the 14,000 level. The Nasdaq is rising more than 8.0% from its previous weekly lows near 13,000. The Dow, meanwhile, is up about 2.2% and has retouched weekly highs at the 34,000 level, about 5.0% higher than previous weekly lows. The CBOE or VIX volatility index fell three points to mid-27.00, a drop of more than 10 points from Thursday’s high of 37.50.

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