US Equities recover after Biden’s Speech

The US equities recovered from intra-day lows on Tuesday in wake of US President Joe Biden’s announcement of new sanctions targeting Russian banks, sovereign debt and wealthy individuals, joining the UK and EU who had already announced similar measures.

After Biden’s remarks, where he urged that the door for diplomacy remains open, US equities staged a rebound, perhaps on hope that a diplomatic resolution could yet avoid further escalation and sanctions. But the news that the Ukrainian President had issued a decree to recruit more reservists led to fresh choppiness just prior to the close.

Some analysts warned not to read too much into the price action with US equities trading at monthly lows, saying the rebound could have been nothing more than a buy the fact reaction after the sanctions unveiled by Biden were largely in line with expectations.

Others said the recovery might have been driven by dip-buying, with some traders cautioning that US equity markets have been overly sensitive to developments in Eastern Europe and should instead focus more on domestic fundamentals.

The S&P 500 index chopped either side of the 4300 level on Tuesday, ending the session more than 1.0% lower. Bears continue to eye a potential test of the January lows in the low 4200s and a close at current levels would confirm that the index has fallen back into “correction” territory (namely more than 10% below recent record highs).

Meanwhile, the Nasdaq 100 index also recovered from intra-day lows, but was unable to regain the 14K level and also dropped more than 1.0%, while the Dow tanked roughly 1.5% to test 33.5K and eye a test of January lows in 33.1K area. The S&P 500 CBOE Volatility Index or VIX remained under 30.00 after testing February highs at 32.00 earlier in the session.

Moreover, the S&P 500 and other stock indices are poised for a major selloff if Russia’s military aggression toward Ukraine escalates to a full-on invasion, Goldman Sachs analysts have warned.

Goldman Sachs issued the dire forecast hours after Russian President Vladimir Putin recognized two breakaway pro-Moscow regions in Ukraine as independent and ordered troops to the enclaves. President Biden and other world leaders have warned of severe sanctions if Putin proceeds with a military offensive.

The S&P 500 could decline by 6% from last Friday’s close in a worst-case scenario event of an invasion and resulting sanctions, according to the bank’s analysts. The tech-heavy Nasdaq could sink nearly 10% and indices in Europe and Japan would also experience heavy losses.

“Although Russia/Ukraine tensions appeared to affect primarily local assets in January, spillovers to global assets have been much more obvious in February,” Goldman Sachs analysts said. “If risks flare up further, and we shift to an outright conflict scenario coupled with punitive sanctions, the build in political risk premium would very likely extend”, analysts added

Goldman also warned of a 13% spike in benchmark US oil prices and a decline in Treasury yields in its worst-case scenario for the Russia-Ukraine conflict. The analysts based their projections in part on how global assets have responded to the volatility of the Russian ruble during recent geopolitical tensions.

Parts of Ukraine are already under shelling amid increased tensions with Russia and pro-Moscow separatists.

However, the analysts noted stocks and Treasury yields would rise in a “de-escalation scenario” in which open military conflict is averted.

US stocks opened lower Monday morning amid heightened investor concerns about the threat of war. Global crude oil prices rose to $99, owing to fears that a conflict would further disrupt the commodities market.

President Biden has already imposed economic sanctions against the two breakaway regions in Ukraine following Putin’s declaration at a bizarre meeting on Sunday.

White House Press Secretary Jen Psaki said those penalties were “in addition to the swift and severe economic measures we have been preparing in coordination with Allies and partners should Russia further invade Ukraine”.