Stocks rally, seizing on Ukraine de-escalation signs
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[February 16, 2022] By
Sujata Rao
LONDON (Reuters) - World stocks crept
higher on Wednesday for the second day in a row, while safe-haven assets
such as government bonds and gold lost ground, despite Western
scepticism over Russian claims of a troop pullback from Ukraine's
borders.
Markets are looking for any sign that one of the deepest crises in
East-West relations for decades is starting to ebb and have seized on
Moscow's announcement of a partial pullback, even while U.S. President
Joe Biden warned there was no proof.
MSCI's global equity index rose 0.4%, following Tuesday's 1.3% bounce,
which snapped a three-day losing streak. Playing catch-up with a late
Tuesday rally in U.S. and European stocks, Japan's Nikkei increased
2.2%.
The STOXX 600 pan-European equity index rose 0.3% and Wall Street was
indicated to open modestly positive.
"The surprise element is gone, the market has already priced in a
certain deterioration in the situation," said Peter Kinsella, head of FX
at Swiss private bank UBP.
"Given where oil is trading, the rouble should be at 65-66 against the
dollar so an awful lot is priced in and the same is true of equities in
Europe," Kinsella said, estimating that gold too was trading with a $100
premium to current fair value.
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The rouble rose modestly to 75 per dollar after strengthening 1.3% on
Tuesday.
But while immediate war fears waned -- Russia published video that it
said showed tanks and military vehicles leaving annexed Crimea --
tensions remain high.
Ukraine hinted Russia was behind a series of cyber attacks on Tuesday
and Russia's parliament urged the government to recognise two breakaway
Ukrainian regions as independent.
All that would keep markets jittery, said Chris Weston, head of research
at brokerage Pepperstone in Melbourne.
"News flow can still shift rapidly, and I suspect there'll be more
twists and turns that suggest geopolitical hedges – long crude, gold,
volatility, and short risk - can make a comeback," Weston said.
Gold, which on Tuesday hit the highest level since June last year at
around $1,879 per ounce, is now around $1,856 [GOL/]. Brent crude rose
$1 a barrel but stayed off seven-year highs hit on Monday [O/R]
With geo-political tensions easing, focus may grow on inflation readings
amid speculation the U.S. Federal Reserve and its peers may go faster
and bigger with interest rate rises.
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The German share price index DAX graph is pictured at the stock
exchange in Frankfurt, Germany, February 11, 2022. REUTERS/Staff
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UK data showed consumer prices increased at the fastest annual pace in nearly 30
years, reinforcing chances the Bank of England will raises rates for a third
meeting in a row.
A day earlier, U.S. data showed core factory gate inflation -- producers' costs
after stripping out food and energy -- posting its biggest gain in a year.
It gave credence to those calling for a half-point rate increase by the Fed in
March, something markets may get more clarity on when the Fed releases the
minutes of its last meeting later on Wednesday.
A Reuters survey of economists leant towards a 25 bps hike but a quarter of
those polled said a half-point move was likely.
The prospect of front-loaded, aggressive rate hikes has dramatically flattened
government bond curves, with the gap between two-year and 10-year UK bond yields
a short way off turning negative -- the so-called inversion that often portends
an economic slump.
The yield on 10-year Treasuries was last at 2.038%. The two-year yield, which
goes up with expectations of higher Fed fund rates, was at 1.5599%.
Earlier this week, the Treasury yield curve hit its flattest levels since
mid-2020 but has since steepened back to around 47 basis points as ebbing war
fears lifted 10-year yields.
For some, the state of the curves shows central banks have fallen behind in
their inflation fight and must act swiftly with policy tightening.
Kinsella said a 50 bps Fed move would be "a pretty big deal" but reckons it was
doable, given where inflation is.
On currency markets, the dollar index shed some of its geo-political premium and
slipped 0.2% to 95.8, pulling back from recent two-week highs [FRX/]
(Reporting by Sujata Rao in London, Daniel Leussink in Tokyo; Editing by Michael
Urquhart)
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