Stock markets tore higher across the world on Tuesday and oil prices shed $2 a barrel, as investors celebrated signs of progress in negotiations between Russia and Ukraine that they hoped would lead to a settlement in a five-week conflict.
Although the US government has warned that Russia’s latest move was a sign that it is redeploying, not withdrawing, troops, investors are still accumulating risky assets, ignoring rising inflation and forthcoming interest rate hikes that could affect growth prospects and reverse the stock market rise.
In a sign that the stock market is heading for headwinds, part of the closely monitored U.S. yield curve reversed for the first time since September 2019, signaling a possible recession in the future.
Indeed, some analysts have warned that the latest period of optimism may be misplaced.
“Over the past two weeks, S&P has recorded one of the strongest rallies in its history, the largest 10-day rally in seven of the S&P 11 bear markets since 1927,” said analysts at Bank of America Global Equity Derivatives Research .
“It did so despite the clearly weaker fundamentals (more growth, higher inflation and a reversal of the curve) and the Fed leaning towards stock market power to grow faster,” they wrote, adding that they believe sustainable US gains are amazing.
US stocks jumped more than 1%, major European stocks were up 1% to 2.5% and oil fell close to $ 5 a point as Russia’s deputy defense minister appeared to say Moscow had decided to cut sharply. military activity around the Ukrainian capital Kyiv and also Chernihiv. read more
With Tuesday’s rally, Wall Street – with the help of data showing a recovery in US consumer confidence in March – rose for the fourth consecutive day. Asia also rose overnight after the Bank of Japan defended its huge economic stimulus program, although the worst month of the yen since 2016 was still a cause for concern.
Traders also rejected the larger-than-expected drop in consumer confidence data in France and Germany and signs that Russia would move ahead with plans to start charging for gas in rubles and was prepared to risk a historic public bankruptcy.
The yield on Germany’s 10-year benchmark bond – the main indicator of European borrowing costs – reached its highest level since early 2018 and 2-year yields became positive for the first time since 2014, adding to seismic changes in global interest rate markets this year. inflation has swelled.
Yields on US bonds stopped rising on Tuesday, but rose dramatically by 165 basis points this quarter.
The benchmark index of 10-year US bonds fell to 2.391% while the equivalent 2-year yields were at 2.367%. More than 200 basis points for US interest rate hikes are also now being valued for 2022, which, if realized, would be the largest in a calendar year since 1994.
The difference between the 2 and 10 year government yields, which is being monitored as a harbinger of a recession, fell slightly to less than 0.03 of the base unit on Tuesday, as traders bet that the aggressive tightening by the Federal Reserve could hurt the economy long term.
This so-called curve reversal is considered a reliable predictor of recession, although some analysts say the curve has been distorted by quantitative easing and investors should not study it too much. The Fed also urged investors to watch other parts of the curve that are still steep, giving it room to tighten policy further and faster.
“We have seen something a bit unprecedented, because the Fed is suddenly facing a question about its credibility and whether it can effectively reduce inflation,” said Francesco Sandrini, Amundi ‘s chief asset strategist.
He added that Amundi had revised its forecast for European growth down to 1.5% for the year from 2% previously, but could be lower if the situation continued to deteriorate.
“We strongly question our forecasts,” Sandrini said, especially as Europe’s big companies are more exposed to commodity pressures than their US counterparts. “It’s extremely complicated, we have to be careful.”
