U.S. stocks drop as war concerns return, oil rises

U.S. stocks fell as hopes faded for de-escalation in the war in Ukraine and investors assessed the risks to economic growth from accelerating inflation. Oil rebounded from a two-day slide.

The S&P 500 dropped for the first time in five days, while the tech-heavy Nasdaq 100 slid 0.5 per cent, with Apple Inc. poised to end its longest rally since 2003. Treasuries rose across maturities, after a brief inversion in a segment of the curve on Tuesday signaled the prospect of a recession. In Europe, short-dated notes led a selloff as traders bet higher-than-expected inflation will force policy makers to end their era of negative rates. 

Russia said talks with Ukraine yielded no breakthroughs and that it was regrouping forces in a push to complete the takeover of the eastern Donbas region. The economic damage from the war is worsening across Europe as already-record inflation soars further and Germany faces a danger of recession because of its dependence on Russian energy. 

“We’re skeptical of getting ahead of ourselves here with regard to hope,” Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, told Bloomberg TV. “While we respect that the amount of liquidity that’s out there and the desire to ‘buy the dip’ after we saw a correction in the S&P 500 and a bear market in the Nasdaq, the reality is that risk has really fundamentally gone up, whether you’re talking about geopolitical risk,” or fundamentals. “We continue to caution folks about the vulnerability of earnings here.” 

Oil rose back over US$106 a barrel in New York. The dollar slipped, the euro climbed and the yen bounced from a six-year low after the Bank of Japan pledged to buy more securities than planned and include longer-dated debt.

President Joe Biden plans Thursday to invoke Cold War powers to encourage domestic production of critical minerals for electric-vehicle and other types of batteries, people familiar with the matter said. The announcement sparked a rally in lithium producers. Germany triggered an emergency plan to brace for a potential Russian gas cut-off as President Vladimir Putin insists that the crucial fuel should be paid for in rubles. Russia may expand the list of commodities for which it demands payment in rubles to include grain, oil, metals and others. 

On the economic front, U.S. companies added 455,000 jobs in March following a revised 486,000 increase in February, according to ADP Research Institute. The data are consistent with the Federal Reserve’s view that the labor market is robust and precede the government’s monthly employment report on Friday, which is currently forecast to show that private payrolls increased by about a half million in March.

Fed Richmond Bank President Thomas Barkin said he’s open to raising interest rates by half a percentage point at the policy meeting in May, depending on how strong the U.S. economy is at that time.

More commentary

• “Markets will get tested again,” said Carin Pai, head of portfolio management and equity strategy at Fiduciary Trust International, which has more than US$102 billion in assets under management and administration. “We’re going to see greater volatility this year. It’s not that we’re bearish at this point, we’re just taking a bit more of a cautious stance, taking a little bit of risk out of our portfolios especially now that the markets have recovered somewhat from the lows we saw.”
• “It’s always hard to predict what the Fed is going to do, it’s even harder in an environment like this,” Troy Gayeski, chief market strategist at FS Investments, said on Bloomberg TV. “It looks like they learned the lessons from ’18 and they are going to move very delicately on the balance sheet. But it’s going to be a sloppy, choppy, messy year. And after the recent rally we have had which some are categorizing as a bear market rally … it’s very hard to get excited about any type of risk-on trading.”
• “I don’t think it’s quite the bear market, but I would say — what is the upside of equities from here — I don’t think it’s that much,” Seema Shah, chief strategist at Principal Global Investors, said on Bloomberg TV. “But the downside risks are so great. Not only is, of course, the geopolitical crisis going on. But then you have the Fed hikes. It’s time to dial down risks.”

Some key events to watch this week:

• China manufacturing, non-manufacturing PMIs, Thursday
• OPEC and non-OPEC ministerial meeting to discuss production targets, Thursday
• New York Fed President John Williams to speak, Thursday
• U.S. jobs report, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5 per cent as of 1:09 p.m. New York time
• The Nasdaq 100 fell 0.5 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.4 per cent
• The euro rose 0.6 per cent to US$1.1153
• The British pound rose 0.3 per cent to US$1.3138
• The Japanese yen rose 0.8 per cent to 121.89 per dollar

Bonds

• The yield on 10-year Treasuries declined five basis points to 2.35 per cent
• Germany’s 10-year yield advanced one basis point to 0.65 per cent
• Britain’s 10-year yield advanced two basis points to 1.67 per cent

Commodities

• West Texas Intermediate crude rose 2.6 per cent to US$106.93 a barrel
• Gold futures rose 1 per cent to US$1,936.90 an ounce