Rate hike fears ease, but Ukraine clouds stock market outlook
New York: Geopolitical concerns cloud the outlook for US equities, even as Russia’s invasion of Ukraine dampens expectations about how aggressively the Federal Reserve will tighten monetary policy in the months ahead.
Concerns over the dispute weighed on the S&P 500 on Friday, as the index pared a rally that saw it rise 5.2% from its February 24 intraday low.
The see-saw moves come as investors hope the Fed could raise rates less than expected amid worries about inflation and rising commodity prices fueled by sanctions on Russia, one of the largest exporters of raw materials in the world.
Investors all but priced in the odds of a sharp 50 basis point rate hike in March, giving a boost to tech and growth stocks that had been battered in recent weeks by anticipation of a severe rate hike. the Fed. Among these, shares of software company Adobe are up more than 5% since last week, with Microsoft up more than 3% in the same period.
“The stock market has been supported by expectations of a less aggressive Fed and lower yields overall. The threat of higher interest rates has receded somewhat,” said Brad Neuman, director of market strategy at Algiers.
Financial indicators on Friday signaled growing signs of stress in global markets as concerns grow over the broader economic fallout from Russia’s invasion of Ukraine.
With falling stock prices and bond yields, gauges seen as stress indicators are attracting investors’ attention.
The so-called FRA-OIS spread, which measures the spread between the three-month U.S. forward rate agreement and the overnight indexed swap rate, hit its highest level since May 2020.
A higher spread reflects increased interbank lending risk or banks hoarding US dollars, meaning it is widely seen as an indicator of banking sector risk.
Meanwhile, geopolitical concerns propelled oil prices, raising fears of slowing growth and rising inflation in the longer term. US crude prices rose above $115 a barrel this week and hit their highest levels since 2008, while other commodities such as wheat also surged.
“The Fed will be less aggressive now that Russia has invaded Ukraine in the short term, but the problem the Fed faces has not been resolved,” Neuman said. “In fact, it was exacerbated.” Next week, investors will be watching US inflation data, which is due out on Thursday. In January, consumer prices rose at their fastest pace in nearly four decades.
For now, however, the surge in US Treasury yields, which move opposite to bond prices, has stalled. The yield on the 10-year Treasury rose more than 50 basis points to start the year at 2.065%, but has since retreated and was last at 1.74%.
Citigroup strategists on Thursday raised their rating on U.S. stocks, which are heavily weighted in tech stocks, to overweight, describing them as a “classic” growth trade.
“Growth stocks have been hit by higher real yields, but should benefit as they reverse,” Citi strategists wrote in a note.
Conversely, yield-sensitive financials have struggled, with the S&P 500 Banks Index falling almost 8% since last week.
Truist Advisory Services this week lowered its rating on the financial sector to “neutral”, while upgrading its ratings on two defensive groups, consumer staples to “overweight” and utilities to “neutral”. “Because of what is happening overseas, it complicates the global picture,” said Keith Lerner, co-chief investment officer of Truist. “The global economy will be a little slower, capping rates, and in itself that’s negative for financials. Some investors have been wary of the stock rebound. Wells Fargo Investment Institute is repricing its asset price targets at following the turmoil in Ukraine, “but we don’t want to overreact when the uncertainty is so high,” said Sameer Samana, senior global market strategist at Wells.