Saqib Iqbal and Ira Iosebashvili

(Reuters) -Plummeting stocks, soaring commodity prices and tightening global financial conditions following Russia’s invasion of Ukraine are clouding the outlook for markets already unsettled by the prospect of a hawkish Federal Reserve.

Dramatic movements are all around you, whether it’s a bear market for the Index or wild rallies to oil and other raw materials or surges in popular safe haven assets like gold.

Over it all, however, is the Fed. It is widely anticipated that the Fed will raise rates next week for its first time in over three years. Some investors are concerned that the U.S. central banks will continue to raise rates to limit rising inflation in spite of the anticipated hit to growth caused by geopolitical instability.

“Traders are not used to this kind of volatility in markets,” said Michael O’Rourke of Jones Trading. “Everyone is trying to figure out what is the next threat and where the next distortion is.”

RAW MATERIALS RALLY

United States sanctions against Russia and its allies, commodity-exporting giant, have caused a surge in prices of oil, metals and other commodities. This has triggered investors’ fear about an increase in inflation that will weigh on global growth.

It has risen more than 25% in March, while nickel prices have more than doubled over Tuesday. This forced the London Metal Exchange into a halt to trading.

We now have stagflation in the U.S., which is characterized by persistently higher inflation, and lower growth rates than we expected, compared to before the (Ukraine war). In a note sent to clients, strategist Ed Yardeni from Yardeni Research stated that a recession cannot be excluded.

BEARS DIE

On Monday the Nasdaq lost 3.6%. That’s more than 20% less than its previous peak. Commonly, this means that it is in a bear market. Germany’s is in bear territory as well, while the benchmark , down nearly 12% this year, recently confirmed a correction.

CREAKYPLUMBING

There are increasing indicators of financial stress across markets. FRA OIS Spread, also known as the FRA spread, measures the gap between U.S.’s three-month forward-rate agreement and overnight index swap rates. Recently, this spread was at its highest since May 2020.

Higher spreads indicate rising interbank loan risk, or banks that have accumulated U.S. dollar reserves. It is commonly viewed as a proxy of risk in the banking sector.

According to Huw Roberts (head of Analytics at Quant Insight, New York), the rush for dollars was a key contributor to the greenback’s rise against the euro in the past two weeks.

More broadly, global financial conditions – the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding in the economy – are at their tightest in around two years.

GYRATIONS

Investors are preparing for higher commodity prices as well as a potential prolonged conflict with eastern Europe. This has led to volatility in currencies, stocks, rates and other assets reaching multi-year heights.

The Cboe, known as Wall Street’s fear gauge, was recently at 33 and has shot up by about 16 points this year.

Sharp (OTC:) rises and falls in Treasury yields – fueled by bets on how aggressive the Fed will be in raising rates in 2022 as well as a flight to safety in U.S. government bonds, have taken the ICE (NYSE:) BoFAML MOVE Index to its highest level since March 2020.

Gyrations of currencies, as well as a rise in the U.S. Dollar have lifted the currency markets. Deutsche Bank (DE) Currency Volatility index to near two-year peak.

FLY TO SAFETY

It’s not surprising that investors are sheltering in gold and the Swiss Franc as well as the US dollar. This has driven up the prices of these so-called safe havens to new multi-month highs. This year, the prices for yellow metal have increased by more than 10%.