Stocks Gain as War Spurs Pullback on Fed Rate Bets: Markets Wrap

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26 Feb 2022, 05:40 AM IST

Stocks Gain as War Spurs Pullback on Fed Rate Bets: Markets Wrap

Kensington Capital Acquisition Corp. signage. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- U.S. equities rose for a second day as 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.

The S&P 500 advanced, with eight of the 11 sectors jumping more than 2%. Meanwhile, gains in the tech-heavy Nasdaq 100 lagged as geopolitical tensions continued to weighed on richly-valued technology shares.

While global stocks are staging a powerful bounce, the rebound remains small compared with the day-after-day declines that came in the weeks before the invasion. It’s coming in a market where fund managers cut positions furiously in January and February, loaded up on options-market insurance and plowed into short sales -- precautions that may be feeding the velocity of the turnaround.

Russia said it was willing to hold talks with Kyiv. However, there was no indication of Ukraine acceding to demands nor signs of a halt in fighting. The U.S. plans to join allies in sanctioning Russian President Vladimir Putin.

Treasuries were flat while the dollar and gold retreated, signaling flagging demand for havens. Crude oil in New York fell to about $92 a barrel.

“What we are experiencing right now is a relief rally that basically caused many short sellers to cover their shorts. But I don’t think the volatility has concluded,” said Sam Stovall, chief investment strategist of CFRA Research. “At least in the near term, Wall Street is saying it’s time to go back to stocks -- instead of being in cash or possibly being in Treasuries.”

A prolonged conflict could deliver a major blow to global markets and slow the normalization of central bank policy that’s expected this year. Yet on the other hand, 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.”

U.S. consumer spending advanced by more than expected last month, despite inflation and the omicron virus variant. Yet, consumer sentiment was still down sharply from January, according to a University of Michigan index.

“Solid economic growth confirms that the Fed does or can move forward with higher interest rates,” said CFRA’s Stovall. “Inflation says it needs to and higher economic activity says it has the ability to.”

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