S&P 500 futures close under 4300 as Ukraine/Russia tensions escalate further and amid hawkish Fed speak

• Prior to the close of US equity index futures trade, S&P 500 futures fell back under the 4300 level.
• Russia will recognise the independence of breakaway regions in Eastern Ukraine, ramping up tensions and weighing on sentiment.
• Hawkish Fed commentary may have added to the downside as US Core PCE inflation data looms later in the week.

S&P 500 futures fell sharply on Monday as geopolitical tensions simmered amid expectations that Russia would recognise the independence of two breakaway provinces in Eastern Ukraine, setting the stage for further military escalation in the region. After a long speech where he explained the history of Ukraine and was strongly critical of the country, Russian President Vladimir Putin made the recognition of the breakaway regions official. US equity index futures trade has been halted since 1800GMT and won’t yet restart for a few hours when Asia markets open, but now before S&P 500 futures dropped below the 4300 level for the first time since late January. When futures trade reopens, traders will undoubtedly be eyeing a test of January lows nearer to 4200.

Another factor that likely weighed on US equity futures on Monday was hawkish remarks from Fed policymaker Michelle Bowman. Bowman said it was too early to know if the US economy needs a 50bps rate hike in March, thus keeping the door open to the prospect of a larger rate move. As market commentators have pointed out, just because geopolitics has come to the forefront as the major market-moving theme in recent weeks doesn’t mean that investors have forgotten about Fed tightening fears. In the context of hawkish commentary on Monday, this week’s US data, especially Thursday’s January Core PCE inflation.

An upside surprise, which would come on the heels of upside surprises for both January’s Consumer and Producer Price Inflation readings, could further build the case for a 50bps move, though most analysts see the February CPI data as key. Regardless, hot data likely won’t go down well in the US equity space and, if coupled with further escalation of the Ukraine crisis, would imply a real risk of breaking out to fresh annual lows in the 4200 area. Note that Monday’s S&P 500 futures close left the index more than 10% below the record highs above 4800 hit at the start of the year, confirming a correction. Investors will worry whether this correction might now turn into a bear market (a 20% drop).