Shares rise as oil prices fall amid optimism about Ukraine’s progress

On Monday, most stock markets rose and oil fell on hopes for progress in Russian-Ukraine peace talks, even as fighting continued, while bond markets braced for rate hikes in the United States and the United Kingdom this week. While Russian missiles struck a large Ukrainian base near the Polish border on Sunday, both sides gave their most optimistic assessment of the prospects for talks yet. S&P 500 stock futures rose 0.5 percent on the prospect of peace, while Nasdaq futures rose 0.4 percent. The EUROSTOXX 50 futures rose 0.5 percent, while the FTSE futures rose 0.2 percent.

The Nikkei (.N225) in Tokyo rose 0.9 percent, but losses in China dragged down MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) by 1.6 percent. Chinese blue chips (.CSI300) fell 1.7 percent after an increase in coronavirus cases caused the southern city of Shenzen to be shut down, fueling speculation about further policy easing. Bonds elsewhere remained under pressure after taking a beating last week as surging commodity prices threatened to drive up inflation even further, with 10-year Treasury yields rising four basis points to 2.04 percent.

Notably, a key measure of U.S. inflation expectations rose to 3 percent, nearing all-time highs. This merely confirmed expectations that the Federal Reserve would raise rates by 25 basis points at its policy meeting this week and signal more to come via members’ “dot plot” forecasts. “Given the stronger pace of inflation since the January FOMC meeting, the dots will likely be primarily clustered around four or five hikes for 2022, up from three previously,” said Kevin Cummins, chief U.S. economist at NatWest Markets.

“We suspect that we will also receive an addendum on how the Fed intends to reduce the size of its balance sheet as early as this week.” The Bank of England is expected to raise interest rates to 0.75 percent on Thursday, the third increase in a row, and to signal further increases, with the market pricing in an aggressive 2 percent increase by year’s end. Fed fund futures suggest no fewer than six or seven hikes this year to around 1.75 percent, keeping the US dollar near its highest level since May 2020. The euro was stuck at $1.0905, not far from its recent 22-month low of $1.0804, while the dollar reached a new five-year high against the yen at 117.87. The Bank of Japan is widely regarded as lagging far behind other major central banks in terms of tightening policy.

“The yen has been unable to display its typical safe-haven characteristics, partly due to the significant rise in US yields and the BoJ yield curve control policy, which prevents JGBs from tracking the rise in core global yields,” said Rodrigo Catril, senior FX strategist at NAB. “Japan is also a major energy importer, raising concerns about a trade shock from higher energy prices.”

On Monday, gold lost some of its safe-haven allure, falling 0.5 percent to $1,975 per ounce, well below last week’s peak of $2,069. Similarly, the prospect of progress on Ukraine caused oil prices to give up some of their recent gains, even as talks with producer Iran appeared to be stalled. Brent crude was last quoted $2.13 lower at $110.54, while US crude was $2.46 lower at $106.84.