Inflation and the path of monetary policy remain a priority for investors as they weigh its economic effects
Wall Street stocks rose and government bonds remained under pressure on Thursday as US president Joe Biden met Nato and G7 leaders to discuss their collective response to Russia’s invasion of Ukraine. The parties forged an agreement to step up preparations for potential chemical and nuclear weapon threats, while investors were awaiting a response from EU leaders on possible blocks to Russian fossil fuel imports.
Investors also remain focused on the path of monetary policy and persistent inflation, after retracing earlier losses stemming from the onset of Russia’s war with Ukraine. Wall Street’s S&P 500 share index closed 1.4 per cent higher, as traders switched money out of a global bond market that is undergoing its deepest downturn since at least 1990 — knocked by concerns over global inflation and expectations of tighter monetary policy.
The Nasdaq Composite added 1.9 per cent. The broad-based S&P has now climbed almost 7 per cent above its closing level on February 23, the day before President Vladimir Putin launched Russia’s invasion of Ukraine. In Europe, the regional Stoxx 600 index lost 0.2 per cent on Thursday and is 7 per cent lower for the year, but the gauge has also retraced losses since the beginning of Moscow’s incursion.
“In an inflationary environment . . . certain parts of the equity market can perform,” said Tim Graf, managing director at State Street. Big tech companies, he added “have near-oligopolistic market positions and a good degree of pricing power”. Still, equity markets were showing “a remarkable level of complacency”, said Olivier Marciot, investment manager at Unigestion, arguing that “it is hard to see how corporate earnings can be maintained alongside higher inflation and lower economic growth”. “There’s a clear divergence between the bond guys and the equity guys,” he said.
“I think the bond guys have it right.” The yield on the 10-year US Treasury note, which underpins global financing costs and moves inversely to its price, rose 0.06 percentage points to 2.36 per cent, close to its highest level since May 2019. The yield on Germany’s 10-year Bund rose 0.06 percentage points to 0.53 per cent, close to its highest level since October 2018. Olaf Scholz, German chancellor, has warned that banning Russian energy “would mean plunging our country and the whole of Europe into a recession”.
Germany imports a third of its oil from Russia and more than half of its gas and coal. However, the US is finalising a plan to supply the EU with up to 15bn cubic metres of liquefied natural gas by the end of 2022 to help reduce the bloc’s dependence on Moscow, the Financial Times reported.
Brent crude oil faded in afternoon trading, settling 2.1 per cent lower at $119.03, but remains up about a fifth since February 23.
The benchmark could exceed $200 this year, traders warned at an FT event in Switzerland. Futures tied to Europe’s wholesale gas price traded at about €114 per megawatt hour, up 1 per cent. The contracts had topped €130 on Wednesday after Putin said “unfriendly” nations should pay for Russian gas in roubles, injecting doubt into existing supply deals.
Prices remain about six times higher than a year ago. The price of gold rose 0.9 per cent to $1,962 per troy ounce as it emerged that G7 leaders had agreed to crack down on Russia’s ability to sell its reserves. In Asia, Hong Kong’s Hang Seng share index fell 0.9 per cent. The Japanese yen, which is trading at about a six-year low against the US currency, weakened a further 1 per cent to ¥122.33 per dollar.