It will be another busy week for the market, with plenty of headline risk given the developments in the Russia-Ukraine conflict over the last few days. The news has already hit the weekend, with the Dow trading down over 1%, but of course, we won’t get a better sense until the futures open at 6 p.m. ET. However, the futures haven’t exactly been a great source of information over the last several weeks.

Russia's Impact

The Russian Ruble Devaluation and Russian Default event in 1998 may serve as a proxy for what to expect if the sanctions placed on Russia affect global markets. Forgive me if my memory is off as I was only 19 to 20 years of age and still in college, but I was an intern and a very active investor. During that August 1998 event, the S&P 500 dropped around 15% from Aug. 28 until Sept. 1.

It is essential to remember that the Fed ended up cutting rates in 1998 as an insurance policy because of the effects of the global turmoil that started in 1997 with the currency crisis in Asia. Then by 1998, Long Term Capital management nearly blew up the financial markets due to its exposure to Russian debt and leverage.

The Fed

There is no evidence to suggest the functioning of markets is threatened, and that is the only way the Fed would step back from its current policy path, which goes back to what I have been saying for months.

The only way the Fed doesn’t start raising rates by March is if the market gives the Fed a way out, which means the market does all the heavy lifting by tightening financial conditions and seeing asset prices fall dramatically well below 4,000 on the S&P. Outside of that, the conflict is not likely to deter the Fed, as inflation is the Fed’s mandate and it is showing no sign of cooling.

This week, there will also be a lot of economic data here in the US, such as the ISM manufacturing and services readings and the BLS Job report. We will see Jay Powell give testimony in front of Congress on Wednesday and Thursday. With mid-term elections coming, the heat will be on Powell to contain inflation and bring it down.

Unfortunately, the Fed is on a path to raising rates, no matter what geopolitical events occur - unless global markets put the economy at risk. Even with the events in Ukraine all week, the Fed’s path to this point is unchanged and is likely to remain unchanged.

The Fed’s Chris Waller noted that he would like a 100 bps hike by the middle of the year, and for the balance sheet reduction to start. Meanwhile, the Fed’s Loretta Mester also indicated that she didn’t think the current conflict changes the need to remove accommodation, with the comments made after Russia moved into Ukraine.

Powell is likely to have a similar tone this week, especially with the political pressure coming down on him to get inflation under control as we prepare for the mid-term election here in the US. It means the Senate and the House are likely to turn up the heat.

Fed Rate Hikes

Fed Futures for December 2022 have been essentially unchanged since the middle of February, which suggests the market sees no change in the policy path to this point.

S&P 500 (SPY)

The S&P 500 managed to post another intense day on Friday, rising by 2.25%. It was a strange day, as put selling did not dominate trading on Friday. In fact, on Friday, there was a lot of put buying and call selling, as noted by the very negative delta’s on the day for the SPY and QQQ ETFs and the SPX index.

What is interesting - and possibly starting to give us some clues as to the longer-term outlook - is how the S&P 500 stopped at 4,385. That marks the 38.2% retracement of the entire move lower. So if we should gap down on Monday as currently indicated, then the rally’s sudden stop would make a lot of sense.

I ultimately think that this past week’s lows will eventually be broken and continue towards 3,800 on the S&P 500. Sure, the index could move slightly higher and head toward resistance at 4,450. But ultimately, fighting the Fed will be too overwhelming for the market to see those all-time highs anytime in the near future.

We know liquidity is thinning in the market, and the spreads between the bid and ask have widened dramatically.

SKEW

We also know that volatility selling is pretty much dead at this point. The SKEW index has not moved in weeks now, a sign that traders are not looking for out-of-the-money protection. It’s probably because traders have nothing to hedge against since they aren’t selling near-money volatility.

Reserve Balances

This shift may be happening because reserve balances held at the Fed by depository institutions have been steadily declining. It is likely why we are now seeing margin levels fall along with liquidity in the markets. Should this trend continue, which is likely given the Fed’s plan to reduce the balance sheet size, stocks will continue to struggle.

Taiwan Semiconductor (TSM)

This week, Taiwan Semi needs to be on the radar as the stock is very close to breaking significant support. Once it does, it will probably send a very negative signal for the sector and global growth in general. If the stock falls below $109 again this week, it may be on its way to $93.

Intel (INTC)

Intel rallied sharply on Friday, but there has been some decent bearish options activity in the name that I noted during the past week. I think this stock is not cheap and will probably trade below $40 in the future. The gap at $47.85 is now filled, and I think it is likely to head lower toward $38 in the weeks to come.

Intuit (INTU)

Intuit fell this week below some critical support and a trend line at $500. This is probably a terrible indication, and the stock may be setting up a potential drop to around $420.