A weekend call between President Biden and Vladimir Putin didn't produce any breakthroughs on the situation in Ukraine, though many analysts didn't anticipate a resolution. The U.S. is not giving in to Russian demands - that NATO pull back its presence in eastern Europe or never allow Ukraine to join the military alliance - and in fact, sees that an invasion could be imminent. National Security Advisor Jake Sullivan announced that an assault could come "any day now," meaning an incursion may happen in the middle of the Beijing Winter Olympics, which was previously seen as no go since the Games are being hosted by Russian ally President Xi Jinping.

Market spillover: The uncertainty has financial markets on edge, with the pan-European Stoxx 600 opening down 2.6% on Monday, while stock index futures in the U.S. also headed lower. In the energy sector, benchmark European gas prices soared as much as 14% on concerns that a conflict could rattle supplies, while crude oil continued its climb toward $100 a barrel. That could drive red-hot inflation even higher, sparking a cost-of-living crisis and weighing on global economic growth.

Meanwhile, the U.S. continues to threaten "swift, decisive and severe" economic sanctions should Moscow goes through with an invasion, though it will not send in troops in case of a conflict. Cutting Russia off from the international payments system SWIFT is also unlikely, but Biden has said Washington would "bring an end" to the Nord Stream 2 (Russia supplies about 40% of the EU's natural gas supplies via pipeline). Over the weekend, Kyiv warned that Moscow had already commenced a "hybrid war," which includes cyberattacks, economic pressure and false bomb threats, and might seek a pretext to send its army deeper into Ukraine.

Thought bubble: Whether Putin invades or not, he definitely likes being in the center of the spotlight. He's been highly successful at attracting attention with an estimated 130,000 troops on the border with Ukraine, but many are hoping the coercive diplomacy won't spiral into something bigger for the continent. Remember that the architecture for European security has been deteriorating for the last decade, and most recently saw the termination/withdrawal of the Treaty on Open Skies in November 2020, the Intermediate-Range Nuclear Forces Treaty in August 2019 and the Treaty on Conventional Armed Forces in Europe in March 2015.

Aerofail

Major defense names like Northrop Grumman (NOC) and L3Harris (LHX) rallied into the weekend on signs of Russian escalation in Ukraine, though another sector headline made waves on Sunday. Lockheed Martin (LMT) called off plans to acquire rocket engine maker Aerojet Rocketdyne (AJRD) under a $4.4B deal that was announced in late 2020. Aerojet is the only large, independent producer of engines for rockets and missiles in America, including liquid and solid booster propulsion, as well as air-breathing hypersonics.

What happened? The Federal Trade Commission sued to block the tie-up last month on the grounds that it could hinder competition. In fact, Lockheed Martin, the world's largest defense company by sales, accounts for 33% of all of Aerojet's sales. The commission also argued that Lockheed could use its control of Aerojet to hurt other defense contractors or harm markets that are critical to national security and defense.

"Our planned acquisition of Aerojet Rocketdyne would have benefited the entire industry through greater efficiency, speed, and significant cost reductions for the U.S. government," Lockheed CEO Jim Taiclet declared, adding that terminating the deal was now in its shareholders' best interest. Both sides likely anticipated some serious regulatory pushback since a termination fee was not included in the agreement in case authorities opposed the combination.

Outlook: Companies are broadly facing tougher approvals for mergers under the Biden administration, which has pushed for more scrutiny of corporate takeovers. Besides Lockheed's blocked purchase of Aerojet, the U.S. Department of Justice is trying to disrupt American Airlines' (AAL) domestic alliance with JetBlue (JBLU). Last week, Nvidia (NVDA) also pulled its planned acquisition of Arm Ltd. from SoftBank (OTCPK:SFTBY), citing "significant regulatory challenges."

Emergency hike?

Speculation is surfacing over an emergency rate hike with decades-high inflation proving to be a more persistent problem than policymakers have anticipated. It's everywhere. Food bills, energy, rent, used-cars, electronic components - you name it. Looking to protect profits, more and more companies are looking to pass along price increases to customers as inflation shows no signs of abating.

Gotta raise em': The market is now pricing in a nearly 100% chance of a 50-basis point hike next month, when the Federal Reserve convenes for its March policy meeting. The percentage is notable given that odds were below 50% at the beginning of last week. Fed funds futures are also pricing in a near-100% chance rates reach 1% in three meetings, and by the end of the year, the benchmark rate could hit 1.75% or more.

Meanwhile, the Fed is meeting today to discuss the advance and discount rates "under expedited procedures." While the "out of cycle" gathering was labeled as an "emergency meeting" by some on social media, the event takes place every month (even during ones that include scheduled policy meetings). In fact, the last time the Fed hiked rates between meetings was in April 1994, when the central bank embarked on a tightening cycle due to fears over inflation.

Analyst commentary: "Those were days when fixed income markets lorded it over equities and bonds could frighten policymakers," said Societe Generale's Kit Juckes. "That 1994 Fed hike was followed by a week of falling yields - even 2-year yields fell slightly - before the bear market returned with a vengeance. An intra-meeting hike when monthly CPI data came in a modest 0.1% higher on the month than expected, and we can all see that base effects will only turn helpful to the inflation outlook in Q2, could be interpreted as panicky and seems unlikely. A 50 bps is definitely less unlikely, if only because it is priced in."

Ambassador Bridge

North America's busiest trade link is open for business once again after Canadian police ended a six-day blockade spurred by the "Freedom Convoy" protests. The Ambassador Bridge connects downtown Detroit with Windsor, Ontario, and is responsible for 30% of $600B in annual two-way trade between the U.S. and Canada. All lanes were open for traffic as of 11 p.m. ET, and while normal border processing has resumed, Canada's Border Services Agency advised against non-essential travel.

Snapshot: Police stepped up their presence on Sunday with more than 50 cruisers, buses and armored trucks, making arrests and towing vehicles to clear access to the bridge. A Canadian judge had earlier granted police permission to forcibly remove protesters following a petition from the City of Windsor and auto industry representatives. High-level consultations also took place, with President Biden meeting with Prime Minister Trudeau via video teleconference on Friday.

Carmakers like Ford (NYSE:F), General Motors (NYSE:GM) and Chrysler-maker Stellantis (NYSE:STLA) had to cut production over the last week since parts couldn't be delivered. Canadian auto parts suppliers also started to cut output without being able to ship orders to the U.S. According to IHS Markit, the blockade could cost the industry as much as $850M, with the daily flow in vehicles and parts estimated at $141M per day.

Go deeper: While the demonstration on the Ambassador Bridge has come to an end, the protests are continuing elsewhere. Truckers and their supporters have been camped out in Ottawa for three weeks, disrupting life in the Canadian capital. Another "Freedom Convoy" continues to block access to the Coutts border crossing in western Canada, connecting the province of Alberta with Montana, while traffic has also been disrupted on the Peace Bridge near Buffalo and the Surrey border crossing in British Columbia.

Today's Markets

In Asia, Japan -2.2%. Hong Kong -1.4%. China -1%. India -3%.
In Europe, at midday, London -1.9%. Paris -3.3%. Frankfurt -3.1%.
Futures at 6:20, Dow -0.7%. S&P -0.8%. Nasdaq -1%. Crude +0.3% $93.36. Gold +0.8% at $1856.70. Bitcoin -0.8% to $42,219.
Ten-year Treasury Yield -3 bps to 1.92%

Today's Economic Calendar

No events scheduled

Companies reporting earnings today »

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