NEW YORK (Reuters) – Geopolitical concerns are clouding the outlook for US stocks, even as the Russian invasion of Ukraine moderates expectations about how aggressively the Federal Reserve will tighten monetary policy in the coming months.
Conflict concerns weighed on the S&P 500 on Friday as the index reduced a rally that saw it rise 5.2% from its Feb 24 intraday low.
The seesaw moves come as investors hope the Fed may raise rates less severely than expected, competing with concerns about inflation and rising commodity prices fueled by sanctions against Russia, a major exporter of raw materials of the world.
Investors practically weighed the chances of a sharp 50bp rate hike in March, giving a boost to tech and growth stocks that had been pummeled in recent weeks by the anticipation of the Fed’s tough tightening. Shares of software company Adobe were up more than 5% from last week, with Microsoft more than 3% over the same period.
“The stock market has been buoyed by expectations for a less aggressive Fed and lower overall yields. The threat of higher interest rates has eased slightly,” said Brad Neuman, director of market strategy at Alger.
The impact of yield moderation was evident below the market surface. Since the day before Russia launched its invasion last week, the S&P 500 growth index, filled with heavily under pressure from higher yielding long-dated bonds, has risen 2.6% versus a 2.3% increase. % for the counterparty value index. The spread narrowed on Friday as the broad market fell.
Meanwhile, geopolitical concerns have pushed oil prices, prompting fears of slower growth and higher long-term inflation. Crude oil prices in the United States surpassed $ 115 a barrel this week and reached their highest levels since 2008, while other commodities such as wheat also rose.
“The Fed will be less aggressive now that Russia has invaded Ukraine in the short term, but the problem facing the Fed has not been solved,” Neuman said. “Indeed, it was exacerbated.”
Investors next week will be watching US inflation data, out on Thursday. Consumer prices in January grew at the fastest pace in the past four decades.
For now, however, the rally in US Treasury yields, which move opposite to bond prices, has come to a halt. The 10-year Treasury bill yielded more than 50 basis points to start the year at 2.065%, but has since retreated and was last at 1.74%.
On Thursday, Citigroup strategists raised their rating on US equities, which are heavily weighted in technology, overweight stocks, describing them as a “classic” growth operation.
“Growing stocks have been hit by rising real yields, but they should benefit as they reverse,” Citi strategists wrote in a statement.
Conversely, yield-sensitive financials struggled, with the S&P 500 banks down nearly 8% from last week.
Truist Advisory Services lowered its rating on the financial sector to “neutral” this week, while it updated its ratings on two defensive groups, consumer staples to “overweight” and utilities to “neutral”.
“Because of what is happening overseas, it complicates the global picture,” said Keith Lerner, Truist’s co-chief investment officer. “The global economy will be somewhat slower by limiting rates, and in itself this is a bad thing for financials.”
Some investors have been wary of the stock rebound. The Wells Fargo Investment Institute is re-evaluating its asset price targets in the wake of the turmoil in Ukraine, “but we don’t want to overreact when the uncertainty is so high,” said Sameer Samana, Wells senior global market strategist.
“With geopolitics still lurking out there, it will be difficult for the market to make significant progress,” Samana said.
(Reporting by Lewis Krauskopf; Editing by David Gregorio)
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