The sharemarket is in a correction, not a collapse

The New York Stock Exchange at Wall Street. Picture: Angela Weiss/ AFP

Wall Street has placed clear bets on the outcome of the Ukraine war and the sanctions against Russia – it will be business as usual for most global corporate giants outside the international banking system.

This is not the outcome that western leaders are looking for.

When markets opened in New York there was a wave of selling with the Dow index down more than 800 points and NASDAQ falling by 3.5 per cent.

But it was a fall driven by emotion and outrage at Russian actions, and soon pragmatic buyers appeared concentrating on the biggest tech stocks led by Amazon, Netflix, Alphabet and Microsoft. The buying quickly sent those stocks into positive territory.

The fact that the buying surge was led by technology stocks indicates that the market is confident that the US giants have the systems that can cope with the looming global cyber war, which is a likely to follow the military action.

Very sadly Russia hold the big guns if a sanctions war develops.

This makes many of the New York analysts confident that the western sanctions will not be made so severe that Russia will retaliate and use its market positions to greatly damage western fabric.

Russia can squeeze western oil and gas supply which is pushing prices higher. But if the increases continue it will send inflation skyrocketing which may require central banks to tighten the screws via greater interest rate rises. But to underline the fact that markets do not expect that to happen, we saw US bond prices rise and yields fall.

In the case of oil, there are many non Russian sources of supply albeit that Russia is very important in the market.

Through long term foolishness, the US has allowed itself to become very dependent on Russia and China. This dependence has been one of the factors that has kept US inflation low but it means that if Russian sanctions are too severe, then Russia can do far more damage to the US than US can harm Russia.

China has already taken steps to lessen the western impact on Russia by buying more of the country’s gas and wheat. This potentially has a great impact on Australia.

The US depends on Russia (and Ukraine) for C4F6 gas, neon, palladium and scandium. C4F6 gas is used for etching node logic devices; neon is essential for chip making and palladium is used for computer memory.

Chips and computers are vital in our technology society and clearly markets expect supply to continue.

The west’s aerospace industry led by Boeing depends on Russia for titanium. Again to underline the markets confidence that Russia will continue to supply Boeing with titanium, the airline stock, after an early sell-off recovered most of the lost ground.

But the markets are telling us that there are several areas of global business that are particularly vulnerable to the sanctions. At the top of the list are European and major global banks. European banks were hammered with some falling around eight per cent. On Wall Street, JPMorgan was hit hard and the other big banks suffered. These banks make a lot of money from the Russians and freezing assets in banks reduces confidence in their position as a safe place to leave money.

As expected the rush to safety saw gold rise in price but Bitcoin initially fell partly because it is seen as being linked into the world banking system, but actually it runs on block chain which is outside the system.

About 10 to 15 per cent of the Russian population own cryptocurrencies, led by the very rich sectors of the population. Crypto buying suddenly emerged (possibly from Russia) and most of the cryptocurrencies moved into positive territory. Gold also lost some of its early gains.

Step aside from the horrors of the Russian actions and we have a sharemarket that is in correction mode but not in collapse. And the bond market is telling us that the interest rate rises will not be as severe as many expect.

It looks as though the US 10-year bond has a ceiling in the vicinity of two per cent. If that ceiling holds, then the interest rate rises that are coming will not be as great as many expect.

If the situation deteriorates markedly and forces much higher interest rates then it will be an entirely different ball game for sharemarkets.