The odds for US President Joe Biden’s Build Back Better spending plan have increased as a result of the war in Ukraine, according to economists at Goldman Sachs (GS).
The prospect of a ban on Russian oil imports could give the legislation – and the more than $550 billion earmarked for combating climate change – a second chance, potentially in a reduced form, wrote the Goldman team, including Alec Phillips and Jan Hatzius, in a report to customers.
“While we do not yet see the enactment of a scaled-down plan as the base case, the chances of some form of legislation passing has increased as a result of the war in Ukraine,” wrote the Goldman economists. “The impact on energy prices of recent events and the importance of energy considerations in sanctions discussions could motivate policymakers on both sides of the Atlantic to accelerate the shift to renewables.”
Efforts to pass the Build Back Better bill were stopped in late December by two Democratic senators. The White House is trying to find a way to advance a new version of the provisions of the stalled act.
According to the Goldman team, the US could move forward with imposing a direct ban on imports of Russian energy products, a move that EU member states, including Germany, have resisted until now.
“While the situation is fluid, we believe the US is more likely to ban Russian oil imports, either through an administrative decision or legislation,” the economists said.
Additional US sanctions could go as far as a blanket ban on trade, investment, and financing, the revocation of Russia’s most favored nation status in the World Trade Organization, or the blocking of additional banks from the SWIFT messaging system, the Goldman team said. “Sanctions could be in place for a long time,” they added.
Volatility continued to dominate global financial markets, with US stocks and oil swinging wildly to headlines related to the war in Ukraine.
The S&P 500 (SPX) fell in the last hour of trading, which saw the main US equity benchmark rise nearly 2% and fall 1%. The index tumbled nearly 3% on Monday, closing more than 12% below its January 3 record. Stocks, commodities, foreign currencies and sovereign bonds have fluctuated wildly in the nearly two weeks since Russia invaded Ukraine, with investors attuned to any shift in sentiment that could force a recalibration of asset valuations.
“I don’t think the market is ignoring anything right now, to be honest with you,” JJ Kinahan, chief market strategist at TD Ameritrade, said by phone. “Actually, everything is hypersensitive to what can happen. It’s so fluid and we’ll see what happens. It is very difficult to predict the day-to-day.”
The US stock market has become a melting pot of war-related opposing bets, their movements amplified by huge options positions that require constant rebalancing on the part of traders. Small swings up and down—often triggered by erroneous or outdated headlines—quickly become large as market makers rush to buy and sell stocks to keep their books neutral, a process known as “gamma hedging,” a process known as “gamma hedging.” term for a type of volatility derivative.
“We’re looking for any indication of peace,” said Peter Mallouk, president of Creative Planning, which has about $230 billion in assets under management. If markets receive this news, “we will see an extremely sharp recovery.”
Sanctions and the war have hit commodities especially hard, causing oil to soar along with raw materials like nickel and wheat. That is complicating the task of monetary policymakers, who face a delicate balance in tightening to contain inflation without killing the economic recovery. Federal Reserve officials are due to meet on March 16 to review interest rates.
The bond sale proposal could come after the bloc’s leaders hold an emergency summit in Versailles, France, from March 10 to 11, according to officials familiar with the preparations. The extraordinary move comes just a year after the EU launched a 1.8 trillion euros ($2 trillion) emergency package backed by joint debt to fund member states’ efforts to deal with the pandemic. Now, the bloc faces huge funding needs as it begins to overhaul its military and energy infrastructure.
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