Rate hike fears are fading, but the outlook for Ukraine’s stock market is clouding over

FILE PHOTO: A Wall Street street sign is seen in New York's Financial District
FILE PHOTO: A Wall Street street sign is seen in the Financial District in New York, the United States, on November 8, 2021. REUTERS/Brendan McDermid/File Photo/File Photo

March 6, 2022

By Lewis Krauskopf

NEW YORK (Reuters) – Geopolitical concerns are clouding the outlook for US stocks, even as Russia’s invasion of Ukraine dampened expectations of how aggressively the Federal Reserve will tighten monetary policy in the coming months.

Concerns over the conflict weighed on the S&P 500 on Friday, as the index eased a rally that lifted it 5.2% from its Feb. 24 low for the day.

The swings come as investors hope the Fed may hike rates less than expected, vying with worries about inflation and higher commodity prices fueled by sanctions on Russia, one of the world’s largest commodity exporters.

Investors have all but priced in the chance of a sharp 50 basis point rate hike in March, buoying tech and growth stocks which have been under pressure in recent weeks on anticipation of harsh Fed tightening. Among those, shares of software company Adobe are up over 5% since last week, while Microsoft is up over 3% over the same period.

“The stock market was buoyed by expectations of a less aggressive Fed and lower yields overall. The threat of higher interest rates has receded somewhat,” said Brad Neuman, Alger’s director of market strategy.

The impact of falling yields was evident below the market surface. Since the day before Russia’s invasion last week, the S&P 500 growth index, crammed with longer-duration stocks that are being hit hard by higher yields, is up 2.6% versus a 2.3% rise in the equivalent index. . That spread narrowed on Friday as the broad market fell.

Meanwhile, geopolitical concerns have pushed oil prices higher, raising fears of slower growth and higher long-term inflation. US crude prices surpassed $115 a barrel this week, hitting their highest level since 2008, while other commodities such as wheat also rallied strongly.

“The Fed will be less aggressive now that Russia has invaded Ukraine in the near future, but the problem the Fed is facing has not improved,” Neuman said. “In fact, it has intensified.”

Investors will be watching US inflation data next week, which is due out on Thursday. Consumer prices rose in January at their fastest rate in almost four decades.

For now, however, the rise in US Treasury yields, which move inversely to bond prices, has stalled. The yield on the 10-year government bond rose over 50 basis points to 2.065% at the start of the year, but has since declined to stand at 1.74%.

Strategists at Citigroup on Thursday raised their rating on US stocks, which are heavily weighted in technology stocks, to overweight, calling them a “classic” growth trade.

“Growth stocks have been hit by rising real yields but should benefit if they reverse,” Citi strategists wrote in a note.

Conversely, yield-sensitive financials have struggled, with the S&P 500 bank index down almost 8% since last week.

Truist Advisory Services this week cut its rating on the financials sector to “neutral” while raising its ratings on two defensive groups, consumer staples to overweight and utilities to neutral.

“What’s happening overseas complicates the global picture,” said Keith Lerner, Truist’s co-chief investment officer. “The global economy will slow down a bit and cap interest rates and that alone is negative for financials.”

Some investors were wary of the rebound in stocks. The Wells Fargo Investment Institute is reassessing its asset price targets in the wake of the unrest in Ukraine, “but we don’t want to overreact when uncertainty is so high,” said Sameer Samana, senior global market strategist at Wells.

“With geopolitics still lurking out there, it’s going to be difficult for the market to make any significant advances,” Samana said.

(Reporting by Lewis Krauskopf; Editing by David Gregorio) Rate hike fears are fading, but the outlook for Ukraine’s stock market is clouding over

Caroline Bleakley

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