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DoubleLine Podcasts

MMM Episode 53: Geopolitical Risk and Markets, Moderating Hawkishness at the Fed

After reviewing the week in markets and macro news, Jeff Mayberry and Samuel Lau take up the market-moving capacity of geopolitical events for their Topic of the Week (16:14). For part of their research, they reference a Deutsche Bank report that analyzed selloffs of the S&P 500 in response to 25 geopolitical events post-World War II. Sam also looks at the behavior of fixed income, oil and gold during these stock selloffs. Interestingly, he notes, the stock-market selloffs were less severe in most cases than some might have expected and tended to be short-lived. The median selloff was a loss of 6%. Only four of the 25 geopolitical events resulted in drawdowns of greater than 10%. The worst event was the Middle East oil embargo of October 1973, which led to a 17% decline in a month’s time. The worst selloffs occurred in the context of already weak economic conditions and/or market trends. This episode of Monday Morning Minutes was recorded Feb. 18, 2022.

The inspiration for the hosts’ choice of topic was the market volatility in recent weeks around changing assessments of the likelihood of a Russian invasion of the Ukraine. The S&P 500 lost 1.6% for the week of Feb. 14-18 (2:08). In fixed income, Jeff and Sam take note of the steepening of Treasury curve (3:27) and spread widening in investment-grade corporates. Commodities (5:14) were up 1.6% with natural gas up more than 12%, perhaps in sympathy with the Russia-Ukraine-roiled nat gas market in Europe. The release of the dovish minutes of the Federal Open Market Committee (9:11) and remarks from Cleveland Fed President Loretta Mester and New York Fed President John Williams, Jeff and Sam say, contributed to markets dialing down the probability of a 50 bp rate hike at the FOMC’s March meeting.

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