Investors rush to safe-haven assets during Ukraine crisis Market turmoil

The Ukraine crisis is accelerating investment in safe havens around the world.

The Russian invasion and the resulting spike in commodity prices have investors flocking to gold and government bonds and taking bets that will pay off if they continue to rise.

The turmoil sparked a trading frenzy tied to one of the largest exchange-traded funds tracking gold, while investors also poured money into government bonds, stemming a wave of early withdrawals. of the year. The WSJ Dollar Index, which measures the greenback against a basket of 16 other currencies, closed Monday at its highest level since June 2020. The dollar is considered a safe haven due to its status as the world’s reserve currency.

Within the stock market, many investors are turning to stocks of utilities and other defensive companies. Shares of utility companies within the S&P 500 have risen 3.4% so far this month, while the broader index has fallen 4.6%, extending its decline for the year at 12 %.

Investors say they face one of the most uncertain economic prospects in decades, and there is little clarity on how the situation in Ukraine will be resolved. Some have worried about the possibility of a prolonged surge in inflation alongside weak economic growth like the stagflation era of the 1970s. Adding to the anxiety, the Federal Reserve is about to start raising interest rates this week and is unlikely to provide support to the markets as it has in recent years.

Eddie Perkin, director of equity investments at Eaton Vance, said he had recently reduced his exposure to financial stocks, fearing that a potential economic slowdown could reduce bank profits. Mr Perkin said he was still considering the long-term implications of the conflict in Europe.

“It seems a bit early to buy me the dip,” Mr. Perkin said. “I don’t see a conclusion to the situation in Ukraine anytime soon.”

In addition to watching the Fed meeting on Tuesday and Wednesday, investors will analyze earnings reports from homebuilder Lennar this week. Corp.

Dollar General retailer Corp.

and FedEx shipping company Corp.

clues about the trajectory of the economy.

The rush for shelter comes as commodity prices around the world have soared, fueling inflation fears. Oil prices have spiked at times over the past week above $130 a barrel, the highest level since 2008, while wheat and corn prices recorded some of their biggest moves in history.

These fears have weighed on equities recently and triggered intense volatility in other markets as well. The Nasdaq Composite fell into a bear market last week, down more than 20% from November’s high. The Dow Jones Industrial Average posted a correction, a decline of at least 10% from a recent high, for the first time since the start of the Covid-19 pandemic.

Hans Olsen, chief investment officer at Fiduciary Trust Co., said his company last week sold stocks and increased its cash positions to prepare for the possibility that the combination of high oil prices and expected rate hikes interest stifles economic growth.

“If it pushes the economy into a recession, we’re going to want cash, one, to protect the portfolio, and two, to take advantage of better values ​​down the road,” he said.

He’s not alone: ​​JPMorgan Chase strategists believe that as of last week, investors had increased their cash positions to the highest level since March 2020.

Certainly, many investors believe that the US economy is in a strong enough position to withstand soaring energy prices. The unemployment rate fell in February to 3.8%, approaching the 50-year low of 3.5% just before the Covid-19 pandemic, while consumer spending rose sharply to start the year.

Some investors have not adopted a defensive posture. Individual investors, for example, bought shares of travel agencies, including United Airlines Holdings Inc.,

Delta Airlines Inc.

and Carnival Corp.

while broadly buying the stock market decline, according to data from VandaTrack. This suggests they expect travel demand to hold up despite rising fuel prices and any broader economic headwinds.

But if oil prices stay high, it could weaken consumer confidence and make households think twice about discretionary purchases. Even before oil hit its recent highs, there were signs of growing caution. The University of Michigan consumer surveys, for example, said its consumer confidence indicator fell in February to its lowest level in more than a decade. On Thursday, economists at Goldman Sachs said they expected slower growth this year due to the Ukraine crisis and rising oil prices.

Within the stock market, sectors traditionally considered defensive have held up better than the S&P 500 as a whole. The utilities group, second in performance in March behind the energy segment, is seen as defensive as customers prioritize gas and electricity bills even as they cut other expenses. The same concept applies to the healthcare group, which is down slightly this month. American Electric Power Utility Stocks Co.

rose 4.5% in March, while shares of hospital operator HCA Healthcare Inc.

are up 4.4%.

Individual investors bought shares in United Airlines Holdings and other travel companies, indicating they expect demand to hold up despite rising fuel prices.


Photo:

Jose M. Osorio/Zuma Press

Utilities stocks also offer a large dividend yield, allowing investors to earn bond-like income. The S&P 500 has a dividend yield of 1.39%, compared to 3.03% for its utilities sector, according to FactSet. The yield on the benchmark 10-year US Treasury bill hovered around 2%.

Many traders flocked to options on one of the largest exchange-traded funds that track gold, sending activity to the highest level since February 2020, while bull trades in particular soared, according to data from Cboe Global Markets. Call activity, which gives the right to buy shares at a specific price on a specified date, hit an all-time high last week. Investors also poured money into the iShares 20+ Year Treasury Bond ETF, giving the fund four straight weeks of inflows after strong outflows to start the year.

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Investors had shunned some of these deals in recent months. Gold prices dipped slightly last year and started 2022 with dips before surging in February and continuing their ascent this month. Treasury yields had risen in recent months as investors positioned themselves for the Fed to raise interest rates. Recently, they recorded some of their biggest falls in the past two years.

The S&P 500 utilities sector gained 14% last year, far underperforming the S&P 500, which rose 27%.

Aash Shah, senior portfolio manager at Summit Global Investments, said his firm had bought stocks in the traditionally defensive consumer staples sector in recent months, including Hormel Foods. Corp.

walmart Inc.

and Procter & Gamble Co.

“Basic spending is not going to slow down,” Shah said. “You’re not going to use less or more toilet paper than two years ago because of interest rates.”

Here’s how rising oil prices could further spur inflation in the US economy. Photo illustration: Todd Johnson

Write to Gunjan Banerji at [email protected] and Karen Langley at [email protected]

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