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U.S. equities gained as mixed economic data and uncertainty due to Russia’s war in Ukraine caused traders to pull back on bets the Federal Reserve will aggressively hike interest rates next month.
Consumer staples led an advance on the S&P 500 after better-than-expected data on income and personal spending. Meanwhile, gains in the tech-heavy Nasdaq 100 lagged behind as geopolitical tensions continued to weighed on high-value technology stocks.
Russia said it was willing to hold talks with Kyiv after China’s leader Xi Jinping urged negotiations on the second day of the invasion. However, there was no indication of Ukraine acceding to Russian demands to surrender nor signs of a halt in the fighting.
Treasuries, the dollar, and gold all retreated, signaling flagging demand for havens. Meanwhile, crude oil in New York fell slightly to about $91 a barrel.
“Investor reaction to situations such as this are usually both severe and short-lived. We anticipate investors will eventually look past the conflict and to underlying economic fundamentals again,” said Nikesh Patel, head of client solutions at Kempen Capital Management.
Consumer sentiment was still down sharply from January, according to a University of Michigan index. Still, U.S. consumer spending advanced by more than expected last month, despite inflation and the omicron virus variant.
“Solid economic growth confirms that the Fed does or can move forward with higher interest rates,” said Sam Stovall, chief investment strategist at CFRA Research. “Inflation says it needs to and higher economic activity says it has the ability to because they will be raising rates and not necessarily throwing us into recession.”
However, a prolonged conflict could deliver a major blow to global markets and slow the normalization of central bank policy that’s expected this year. Disruptions of raw materials and food could also stoke already-high prices and heap pressure on central banks to act faster to curb inflation.
The Federal Reserve reiterated its view Friday that it will “soon” be time to raise interest rates. Markets still see around six quarter-point increases by the Fed, but bets on other central bank’s hiking cycles have been pared in recent days.
“This conflict implies a further deterioration of the already tricky growth-inflation trade-offs central banks have been facing, making the upcoming decisions particularly hard,” Silvia Dall’Angelo, senior economist at the international business of Federated Hermes, wrote in a note to clients. “Downside growth risks from the geopolitical backdrop mean that they are likely to proceed gradually and cautiously.”
In contrast, Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the idea that risk assets should rally because the Fed was less likely to raise rates seemed like a “head fake.”
“The market has been incredible sanguine about the impact of the war in Ukraine, completely missing the reason the Fed is raising rates and why they can’t slow down their pace of tightening,” he said. “With inflation likely to be exacerbated by disruptions due to war, the Fed needs to do the opposite of what they would normally do, and that’s to fight an even bigger threat of inflation.”
Here are some events to watch this week:
- U.S. consumer income, U.S. durable goods, PCE deflator, University of Michigan consumer sentiment Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.6% as of 11:30 a.m. New York time
- The Nasdaq 100 rose 1%
- The Dow Jones Industrial Average rose 1.7%
- The Stoxx Europe 600 rose 3.3%
- The MSCI World index rose 2%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.6% to $1.1256
- The British pound rose 0.2% to $1.3409
- The Japanese yen was little changed at 115.59 per dollar
Bonds
- The yield on 10-year Treasuries advanced two basis points to 1.98%
- Germany’s 10-year yield advanced six basis points to 0.23%
- Britain’s 10-year yield advanced one basis point to 1.46%
Commodities
- West Texas Intermediate crude fell 1.7% to $91.21 a barrel
- Gold futures fell 2% to $1,887.70 an ounce
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