Thursday, December 8 2022

Geopolitical worries are clouding the outlook for US equities, although Russia’s invasion of Ukraine is dampening expectations about how aggressively the Federal Reserve will tighten monetary policy in the months ahead.

Conflict concerns weighed on the S&P 500.SPX on Friday as the index pared back a rally that saw it rise 5.2% from its February 24 intraday low.

The seesaw moves come as investors hope the Fed can raise rates less seriously than expected competed with concerns about inflation and rising commodity prices, fueled by sanctions against Russia, one of the world’s largest commodity exporters.

Investors all but priced in the odds of a sharp 50 basis point rate hike in March, giving a boost to tech and growth stocks that had been battered in recent weeks by anticipation of a severe rate hike. the Fed. Among these are shares in software company Adobe ADBE.O increased by more than 5% since last week, with Microsoft MSFT.O up more than 3% over the same period.

“The stock market was supported by expectations of a less aggressive Fed and weaker returns overall. The threat of higher interest rates has receded somewhat,” said Brad Neuman, director of market strategy at Alger.

The impact of moderating yields was evident below the surface of the market. Since the day before the launch of the Russian invasion last week, the S&P 500 growth index.IGXfilled with longer duration stocks heavily under pressure from higher yields, climbed 2.6% vs. a 2.3% rise for the counterpart value index.IVX. This gap narrowed on Friday as the broader market fell.

Meanwhile, geopolitical concerns propelled oil prices, raising fears of slowing growth and rising inflation in the longer term. US Crude Prices CLc1 rose above $115 a barrel this week and hit its highest level since 2008, while other commodities such as wheat also surged.

“The Fed will be less aggressive now that Russia has invaded Ukraine in the short term, but the problem the Fed faces has not been resolved,” Neuman said. “In fact, it was exacerbated.”

Next week, investors will be watching US inflation data, which is due out on Thursday. In January, consumer prices rose at their fastest pace in nearly four decades.

For now, however, the surge in US Treasury yields, which move opposite to bond prices, has stalled. The yield on the 10-year Treasury rose more than 50 basis points to start the year at 2.065%, but has since retreated and last stood at 1.74%.

Citigroup strategists on Thursday raised their rating on U.S. stocks, which are heavily weighted in tech stocks, to overweight, describing them as a “classic” growth trade.

“Growth stocks have been hit by higher real yields, but should benefit as they reverse,” Citi strategists wrote in a note.

Conversely, yield-sensitive financials struggled, with the S&P 500 Banks Index.SPXBK down almost 8% since last week.

Truist Advisory Services this week lowered its rating on the financial sector to “neutral”, while upgrading 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, co-chief investment officer of Truist. “The global economy will be a bit slower, capping rates, and that in itself is negative for financials.”

Some investors were wary of the stock rebound. The Wells Fargo Investment Institute is reassessing its asset price targets following the turmoil in Ukraine, “but we don’t want to overreact when the uncertainty is so high,” said Sameer Samana, senior global market strategist. at Wells.

“With the geopolitics still lurking there, it’s going to be difficult for the market to make meaningful headway,” Samana said.

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