HOT AIR BALLOON FLIGHT

By Julia Horowitz • Monday, January 24

Good morning. In today's newsletter: Investors are nervously watching the situation in Ukraine. Plus, why Unilever's stock is popping, and Jeremy Grantham warns of a "superbubble."

 

US stock futures are lower after the S&P 500 had its roughest week since March 2020. Markets in Europe dropped sharply in early trading on Ukraine fears, while stocks in Asia were mixed.

 

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MARKET FLASH

Russian invasion would bring more fear to markets

Uncertainty around the Federal Reserve's plans just drove Wall Street to its worst week since the start of the pandemic.

 

But it's not the only reason traders are jittery.

 

What's happening: Investors are starting to tune in to the situation in Ukraine as fears grow that Russian President Vladimir Putin, who has been amassing troops on the country's border, could order an invasion.

 

Michael Hewson, chief market analyst at CMC Markets, told me that the "tipping point" was news that the United States and United Kingdom are withdrawing some staff from their embassies.

 

"That's really given European markets a really hard nudge lower," he said. Germany's DAX index and France's CAC 40 are both down about 2% in early trading. US futures are also in the red, though the declines are narrower.

 

The US dollar and Japanese yen, both considered safe haven assets, are gaining ground.

 

State Department officials said that the decision was made out of an "abundance of caution" and that the threat to US personnel in the country has not increased in recent days. But investors are nervous.

 

"I think it's important not to underestimate how big a deal this is," Hewson said. "It suggests there is a real concern that diplomacy alone may not be enough to prevent a Russian incursion into Ukraine."

 

Breaking it down: Surging inflation has forced investors to reconsider how quickly the Fed could raise interest rates this year. That's rattled stock and bond markets, which had become accustomed to rock-bottom rates during the pandemic. The CNN Business Fear & Greed Index finished last week in "fear" territory.

 

The Fed's course of action remains the main source of anxiety. But Wall Street is worried that an escalation in Ukraine could disrupt the flow of energy supplies to Europe, sending already-elevated prices into the stratosphere.

 

Hewson said that oil prices could quickly rocket to $100 per barrel in that case. Oil is currently trading around $88 per barrel globally, near its highest level in seven years.

 

Natural gas prices would be heavily exposed, too.

 

"Should tensions between Russia and the Ukraine escalate, the initial uncertainty around its impact on gas flows would likely lead the market to once again add a significant risk premium to European gas prices," Goldman Sachs analysts said in a recent note to clients.

 

A shock to energy markets would hurt the region's economy as it recovers from the pandemic. An important gauge of activity from IHS Markit, released Monday, showed that output hit an 11-month low in January due to restrictions tied to the Omicron variant of the coronavirus.

 

The market mood is already on the rocks. Instability in Ukraine presents another reason to stress.

 

"The more markets are feeling this could evolve into a fully-fledged geopolitical disaster, the more risk sentiment will be impacted," ING analyst Francesco Pesole told me.

VOICES

Why the global economy has room to run

"There is inflation. That has to be fixed. But the pent-up demand because of the pandemic, that will continue."

 

EY CEO CARMINE DI SIBIO

 

Watch his full interview with CNN Business.

NEWS ALERT

Why Unilever's stock has snapped back

Unilever's stock got hammered last week after the company revealed it had made three failed bids to acquire GlaxoSmithKline's consumer health care business. But investors are seeing reason for optimism on Monday.

 

The latest: Shares are up 6% in London following reports that activist investor Nelson Peltz has built up a stake in the consumer goods behemoth, which makes products like Ben & Jerry's ice cream and Dove soap.

 

Shareholders are hungry for a turnaround at Unilever after shares stagnated in recent months. Peltz's involvement could feed momentum for a bold overhaul.

 

On the radar: CEO Alan Jope has promised to reveal a new strategy soon — though it's not yet clear what that will entail.

 

Last week, Jope defended Unilever's attempts to buy the GlaxoSmithKline unit that makes Advil and Tums, saying that he saw ramping up the company's exposure to health items and cosmetics as a winning strategy.

 

And yet: Unilever said Thursday that it would not raise its rejected £50 billion ($68 billion) offer, raising questions about Jope's next move.

 

Unilever's stock, which fell 10% in 2021, is now down 1% year-to-date.

UP NEXT

Philips and Halliburton report results before US markets open. IBM follows after the close.

Also today: The latest Purchasing Managers' Index for the United States posts at 9:45 a.m. ET.

 

Coming tomorrow: Earnings from Johnson & Johnson, Lockheed Martin, Verizon, Microsoft and Texas Instruments.

WHAT WE'RE READING AND WATCHING

▸ Worker absences triple because of Omicron (CNN Business)
▸ Bitcoin tumbles almost 50% from record high (CNN Business)
▸ Australia says WeChat has removed prime minister (CNN Business)
▸ Activist investor wants Peloton to fire its CEO (Wall Street Journal)
▸ Ireland's data centers come under the microscope (CNN Business) 
▸ Treasury yields struggle for direction ahead of Fed meeting (CNBC)

FINAL WORD

Is the stock market a 'superbubble' about to burst?

Jeremy Grantham is not the only high-profile investor to warn that easy money has set off an unsustainable feeding frenzy. But as stocks fall, the latest amped-up admonition from the British money manager is getting lots of attention.

 

The scoop: In a report published last week, Grantham — who studies market bubbles and was also bearish ahead of the 2000 dot-com crash and the 2008 financial crisis — said US stocks are in their fourth "superbubble" of the past 100 years, and that a massive pullback can "begin at any time."

 

Grantham said stocks were in an "epic bubble" this time last year. The market wrapped up 2021 near record highs and with its third straight year of gains. 

 

But Grantham's new letter is gaining traction as Wall Street debates what's next for the market now that the Fed is backing away from crisis-era policies. 

 

Grantham blamed the central bank for creating "superbubble" conditions by instituting near-zero interest rates and executing hundreds of billions of dollars in asset purchases. The public, he said, will pay the price.

 

"One of the main reasons I deplore superbubbles — and resent the Fed and other financial authorities for allowing and facilitating them — is the underrecognized damage that bubbles cause as they deflate and mark down our wealth," he said. 

 

As asset prices soar and personal wealth grows, people start spending accordingly, Grantham continued. That causes real pain when the party ends.

 

"As bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down," he said. "To allow bubbles, let alone help them along, is simply bad economic policy."