Investability bulletin 24/02/22: Putin Strikes

Markets tank, gold and oil surge as Russia launches a full-scale invasion of Ukraine

Photo by Don Fontijn

European stock markets plunged, while gold and oil spiked higher as Russia began a full-scale invasion of Ukraine. Very swift kneejerk moves but does Apple or Diageo look any less investable today than yesterday? The underlying narrative remains the Fed and inflation – this war will only make inflation problems worse, particularly for Europe.Scores on the doors at the open: DAX -3.6%, CAC 40 -3.2%, FTSE 100 -2.4%. FTSE futures touched the January lows just ahead of the open but bounced as the cash equity market opened. US stocks plunged on Wednesday, led by tech, and futures are softer still. Dow futs have lost 1,500 points since yesterday afternoon. SPX heading into correction territory at the open after just missing out on that crown yesterday (10% below Jan all-time high).
 
Russian markets are in meltdown, chiefly on sanctions fears and the country effectively being ousted from the international financial order. Russia’s ruble-denominated MOEX sunk 35%, the dollar-denominated RTSI down 40%, its worst day on record, whilst the ruble plunged. Russia’s central bank has intervened but the currency was still down by 7% against the dollar, with USDRUB at 87. Sanctions will bite, access to Western capital markets, etc. Russia is uninvestable. Evraz and Polymetal absolutely crushed, both -35% or so today after already heavy losses YTD.
 
Brent oil futures spiked to $104, WTI up to $98 from below $93 prior….no sign of a top yet but we are entering demand destruction levels. Certainly stagflation prices. All the action is in the front months…steep backwardation in the futures curve highlights very severe near-term supply fears and event risk to the situation regards Ukraine specifically, whilst less pressure seen further out indicates less in the way of longer-term structural supply-demand stress. BP shares -3% (Rosneft) vs Shell -0.5% this morning despite the soaring price of oil.
 
Gold spiked to $1,950, its highest since the end of 2020. Bitcoin plunged 5% to $35k…think we are finding out which of the two is the real haven. Industrial metals have also shot higher.
 
There was an air of complacency yesterday as investors hoped that Russia’s incursions would be limited. That fragile hope has been shattered a Russian forces moved in overnight, apparently on all fronts. Putin delivered a TV address calling to “de-Nazify” Ukraine and demanded their forces lay down their arms. He also demanded Ukraine demilitarised. Looks like a move for blitzkrieg to install a Kremlin puppet regime.
 
The West is following up with more severe sanctions…but it’s hard to think these can work now the die is cast. Another spectacular foreign policy failure by Biden…a new era for the security order not just for Europe but everywhere. China can look to Taiwan.
 
Question for you stock pickers and traders: When do the moves look overdone; when do you start nibbling away at some bargains? There is considerable pressure on all risk assets and the broad capitulation will inevitably lead to some babies being thrown out with the bath water. Fast markets…but it will quieten down…we are probably close to peak ‘fear’ markets wise…unless there is some escalation but it’s hard to see the West getting involved on that front…look to VIX backwardation softening first though. Currently seeing VIXX at 32 but has pulled off its highs from this morning a touch. Would like the Vix term structure to flatten out before catching a falling knife.
 
Company updates
 
Rolls Royce -15% on earnings and departure of CEO Warren East. Big loss as he’s been central to the turnaround. The company reported underlying operating profit of £414m (statutory £513m) as recovered from the prior year loss. Management said the improved profit picture reflected significant cost savings from the restructuring programme, primarily in Civil Aerospace, continued resilient performance in Defence and strong growth in Power Systems as it benefitted from recovering end markets. 
 
Lloyds down almost 10% on its full-year profits missing expectations. Q4 pre-tax profits missed at £968m, nudging full-year profits to £6.9bn, which was below the £7.2bn expected. Management noted solid net income of £15.8 billion, up 9% for the year, with underlying net interest income of £11.2 billion, up 4%, whilst underlying other income of £5.1 billion was up 12%. Underlying net interest income benefitted from increased average interest-earning banking assets, up 2% and a strengthened banking net interest margin of 2.54%. Lloyds is targeting NIM of 2.6% in 2022. Past misdeeds still a problem…Remediation charges of £1.3bn , with £775 million in the fourth quarter, including £600 million in the quarter for HBOS Reading…Q4 costs of £2.5bn were about a quarter higher than expected. Lloyds also unveiled a £4bn investment strategy to build out a wealth management business and better tech. Divi up, £2bn share buyback failing to offset worries about costs.
 
BAE Systems up almost 3% with underlying EBIT +13% to £2.2bn , Hikma -7% as pre-tax profits slipped 2.5% to $544m. Anglo American shares +2.5% as profits doubled and dividend trebled.

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