European stocks pick up; risk appetite hurt by Ukraine fears, Fed hawkishness

[January 25, 2022]  By Elizabeth Howcroft

LONDON (Reuters) - European stocks opened higher on Tuesday, after a downbeat Asian session, with world stocks set for their biggest monthly drop since the pandemic hit markets in March 2020.

The move is attributed to fears over tensions between Russia and the West and the prospect of monetary policy tightening.

A build-up of Russian troops on Ukraine's border has caused fears that Russia will invade. NATO said on Monday it was putting forcing on standby and reinforcing eastern Europe with more ships and fighter jets.

The U.S. Federal Reserve begins its two-day meeting on Tuesday. It is expected to give guidance about the trajectory of monetary policy tightening ahead of the meeting in March in which investors expect the first post-pandemic rate hike.

Tightening monetary policy typically hurts riskier assets, such as equities, and makes government bonds more attractive to investors.

After a weak Asian session in which stock indexes extended Wall Street's losses, European markets opened higher.

The STOXX 600 was up 0.5%, showing some signs of recovery after it dropped to its lowest since October on Monday.

London's FTSE 100 was up 0.3%.

But the MSCI world equity index, which tracks shares in 50 countries, was down 0.2%.

World stocks have fallen 6.5% so far this month, the most since the 13.8% monthly drop when the COVID-19 pandemic hit markets in February 2020.

"What we have seen in a combination of the rising geopolitical risk ... in combination with the market downside risk triggered by the more hawkish Fed," said Eddie Cheng, head of international multi-asset investment at Allspring Global Investments.

Cheng said the geopolitical risk surrounding Ukraine would last for much longer, whereas investors were likely to get more certainty from the Fed at the meeting this week.
 

A view of electronic screens showing stock information is seen in the market services surveillance room center at the Euronext headquarters at La Defense business and financial district in Courbevoie near Paris, France, November 21, 2019. REUTERS/Charles Platiau

The world equity index has fallen below its 200-day moving average. The last time this happened, stocks had a 30% drop and bounce.

But Allspring's Cheng said there was unlikely to be such a drop this time, in the absence of a driver as big as the start of the COVID-19 pandemic.

"We don't expect that equities are going to go all the way down just because of one geopolitical risk," he said.

The sell-off in equities had limited impact on rates markets, with investors pricing in about 100 basis points of rate hikes for the Federal Reserve and Bank of England this year.

Although investors do not expect a rate hike at this week's Fed meeting, the market is pricing in a 5.4% chance of this happening, according to Refinitiv data on Eikon.

At 0915 GMT, the U.S. 10-year yield was at 1.7778%, a touch higher on the day.

Germany's benchmark 10-year yield was up 3 bps at -0.073%, with bonds supported by the risk-averse tone.

The U.S. dollar index was up 0.2% at 96.07, while euro-dollar slipped.

Oil prices recovered some of the previous day's losses, as the geopolitical tensions fuelled supply fears.

Meanwhile, cryptocurrencies slipped further. Bitcoin was trading around $36,230 dollars. On Monday it hit a six-month low of $32,950.72, having halved since its latest all-time high of $69,000 hit in November.

(Reporting by Elizabeth Howcroft; editing by David Evans)

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