A surge in oil sent shivers through risky assets Tuesday, reversing an early recovery in American stocks and sending some European markets down 4 per cent. Bonds rallied amid concern about the impact of war on global economies, with 10-year U.S. yields posting their worst four-day drop since December.

The S&P 500 briefly extended losses in the final minutes of trading after Apple Inc. halted product sales in Russia following the country’s invasion of Ukraine. Crude traded near US$105 a barrel, raising fears about potentially higher inflation that could complicate the Federal Reserve’s job at a time when Russia’s invasion of Ukraine is seen as a threat to global growth. Bonds climbed across the curve, with swaps linked to the Fed’s March 16 meeting dwindling to 22 basis points of tightening. That suggests traders don’t even expect a full quarter-point hike -- a contrast from last month, when a half-point move was all but fully priced amid concern over accelerating inflation.

“Investors struggle to go long risk as the Russia-Ukraine crisis intensifies and as surging oil prices threaten economic growth prospects,” said Edward Moya, senior market analyst at Oanda. “Stagflation risks have never been greater, and that should continue to fuel the many commodity super cycles that are running hot.”

President Joe Biden is being pressured by lawmakers in both parties to cut off U.S. imports of Russian oil and gas. Such a move would likely send gasoline prices surging, adding to inflation pressures. Biden will deliver his State of the Union speech at 9 p.m. in Washington. Not since 2003, when George W. Bush laid out his case for war against Iraq, or 2010, when Barack Obama was confronting the financial crisis, has a U.S. leader delivered his annual address to Congress in such a fraught moment.

Meantime, Fed Chair Jerome Powell will try to reassure lawmakers this week that the central bank will act to curb the hottest inflation in four decades while remaining flexible in the face of geopolitical uncertainties. He’s set to testify in a semiannual monetary-policy testimony to House and Senate panels starting Wednesday.

More comments:

  • “The Russia/Ukraine conflict is driving oil and other commodity prices higher, which does present the possibility of inflation remaining higher for longer,” wrote Lindsey Bell, chief markets and money strategist at Ally.
  • “We are wrestling with the news cycle, and how prolonged hostilities in Ukraine would slow economic growth,” said Larry Weiss, head of equity trading at Instinet. “There’s thoughts that this slowdown would be cause for less hawkish moves by the Fed.”
  • Given the heightened uncertainty surrounding Ukraine, a half-point Fed hike “would simply be too aggressive at the moment,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman.

Embedded Image

Russia said it would press forward with its invasion of Ukraine as the war enters a more brutal stage. European Union ambassadors agreed to exclude seven Russian banks from the SWIFT financial-messaging system, but spared the nation’s biggest lender Sberbank and a bank part-owned by Russian gas giant Gazprom.

U.S. equities are off to another rocky start this year as prospects for higher interest rates and Russia’s invasion of Ukraine combine to put the “stocks-only-go-up” mantra to the test. The S&P 500 saw back-to-back monthly declines for the first time in almost a year and a half, bringing its losses this year to 8.2 per cent, its worst start since the pandemic roiled markets to begin 2020. One ray of hope for investors: Each of the last four times the S&P 500 closed lower through February, it finished the year higher by at least 9.5 per cent.

What to watch this week:

  • Fed Chair Jerome Powell testifies to Congress on monetary policy, Wednesday and Thursday
  • OPEC+ meeting, Wednesday
  • Eurozone CPI, Wednesday
  • Bank of Canada rate decision, Wednesday
  • ECB publishes the account of its February meeting, Thursday
  • U.S. unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.5 per cent as of 4 p.m. New York time
  • The Nasdaq 100 fell 1.6 per cent
  • The Dow Jones Industrial Average fell 1.8 per cent
  • The MSCI World index fell 1.4 per cent

  • The Bloomberg Dollar Spot Index rose 0.4 per cent
  • The euro fell 0.8 per cent to US$1.1132
  • The British pound fell 0.7 per cent to US$1.3325
  • The Japanese yen rose 0.2 per cent to 114.81 per dollar

  • The yield on 10-year Treasuries declined 11 basis points to 1.72 per cent
  • Germany’s 10-year yield declined 21 basis points to -0.07 per cent
  • Britain’s 10-year yield declined 28 basis points to 1.13 per cent

  • West Texas Intermediate crude rose 9.4 per cent to US$104.72 a barrel
  • Gold futures rose 2.5 per cent to US$1,948.10 an ounce