US stocks fall as traders weigh Russia-Ukraine tensions and Fed policy

US stocks fell while oil prices rose on Wednesday as traders weighed developments on the Russia-Ukraine border and the prospect of tighter monetary policy to tackle persistently high global inflation.

Wall Street’s blue-chip S&P 500 index dropped 0.6 per cent and is now down more than 6 per cent so far this year. The technology-heavy Nasdaq Composite index slid 1.1 per cent, reversing some of Tuesday’s 2.5 per cent advance.

The price of Brent crude, the oil benchmark, rose 2.5 per cent to $ 95.65 a barrel. It had climbed to $ 96.78 earlier in the week to hit a seven-year high.

Western security alliance NATO warned on Wednesday that Russian troop numbers continued to rise near the Ukraine border. Jens Stoltenberg, NATO secretary-general, said on Wednesday: “We have not seen any de-escalation.”

On Tuesday, Vladimir Putin, Russia’s president, had eased tensions by saying that Moscow was drawing down some troops from border areas to enable “dialogue” with the west.

Joe Biden, US president, later said during a briefing at the White House that there was still a “plenty of room for diplomacy” to resolve the crisis. But he also noted that Russia had massed about 150,000 troops along the Ukrainian border and remained “very much in a threatening position.”

US stocks have whipsawed on Russia-Ukraine news

Europe’s Stoxx 600 share index moved between small gains and losses, and closed broadly flat. London’s FTSE 100 lost 0.1 per cent, while Germany’s Dax also shed 0.1 per cent. France’s blue-chip Cac 40 stock index fell 0.2 per cent.

Wall Street and European equities had rallied in the previous session as oil prices fell. Yet Mike Zigmont, head of trading and research at Harvest Volatility Management, said the bullish case for equities would be “a tough one to argue” once investors turned their attention away from Ukraine and back to the US Federal Reserve.

The next meeting of the US central bank’s Federal Open Market Committee is scheduled for mid-March, with economists expecting interest rates increasing to tackle inflation, which in January rose at its fastest annual pace since 1982.

“Investors should be ready for that kind of policy change,” Zigmont said in a note. “I feel like they are not, however, and they will need to adjust as we approach the announcement.”

Roger Lee, head of UK equity strategy at Investec, questioned the extent to which markets had ever priced in a war in Europe. “We would have seen a far bigger flight to safety” if investors believed an invasion was truly imminent, he said.

Recent market ructions have instead been driven by valuation adjustments ahead of the Fed’s meeting next month, Lee said. “We know rates are going higher, but we don’t know how high or how fast and that is what markets are struggling with,” he added.

Investors have closely followed options and futures markets to gauge the potential fallout that could be inflicted on their portfolios by both the situation in Ukraine and the Fed.

A rise in the Cboe’s Vix volatility index, which had surged as high as 32 this week, was indicative of market stress, traders said, with the February contract trading at levels above expiring contracts for March, April and May.

Price of Vix futures expiring over the course of 2022

Futures contracts that expire months from now tend to trade at higher prices than near-dated ones because of a relative lack of visibility.

“When that front end spikes, that is when you know there is real fear,” said Matthew Tym, the head of equity derivative trading at Cantor Fitzgerald. He added that it indicated an “imminent fear now rather than somewhere down the road”.

In government debt markets, the yield on the 10-year US Treasury note was steady at 2.04 per cent. The yield on Germany’s equivalent Bund fell 0.04 percentage points to 0.28 per cent. Bond yields move inversely to their prices.

In Asian equity markets, Hong Kong’s Hang Seng gauge added 1.5 per cent on Wednesday and Tokyo’s Nikkei 225 added 2.2 per cent.

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