European and US equities rallied, oil prices fell and the euro strengthened after Russia said it would reduce its military operations near Ukraine’s capital, Kyiv.
The Stoxx Europe 600 share index added 2.1 per cent, taking it to its highest level since February 18, before Russia launched its full-scale invasion of Ukraine.
European carmakers’ shares rose 6.3 per cent as investors banked on a moderation of hostilities easing supply chain disruptions. The Stoxx sub-index of European bank shares rose 3.2 per cent, boosted by a rosier outlook for a eurozone economy that is highly dependent on energy supplies from Russia, wiping out all of its losses for March so far.
On Wall Street, the benchmark S&P 500 share index rose 0.9 per cent and the technology-heavy Nasdaq Composite advanced 1.3 per cent.
“Investors can’t know much about wars other than they end at some point, and headlines that seem to bring that day forward are obviously very good for market psychology,” said Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.
Russia said it had decided to “dramatically” scale back military activities in the Kyiv and Chernihiv areas after envoys from Moscow and Kyiv met in Istanbul on Tuesday to discuss a possible peace deal.
The euro jumped 1.3 per cent against the dollar to $1.113 while Russia’s rouble climbed against the greenback.
Germany’s two-year bond yield briefly rose above zero for the first time since 2014 as the price of the debt security fell, reflecting bets of a peace deal boosting the European Central Bank’s resolve to tighten monetary policy.
Brent crude oil fell 6 per cent to $106 a barrel, having risen close to $140 in early March. West Texas Intermediate fell by a similar margin to $99.84.
Many investors fear a moderation in the Ukraine conflict will provide only a short-term boost to equity markets, as central bank rate rises increase companies’ costs of doing business.
Guilhem Savry, cross-asset manager at Unigestion, said that while short-term, trend-following hedge fund strategies were at present buying equities, “this could reverse quickly as [economic] fundamentals are not supportive”.
He added: “We are in a short-term positive cycle that will change once there is a negative geopolitical event or negative economic growth data.”
The fall in oil eased the global inflation outlook, removing some pressure from US Treasuries, which have dropped sharply in price this month as traders bet on the Federal Reserve raising interest rates rapidly.
The yield on the benchmark 10-year Treasury, which moves inversely to its price and underpins borrowing costs worldwide, dropped 0.07 percentage points to 2.41 per cent. The two-year yield fell 0.04 percentage points to 2.35 per cent.
The small gap between the two and 10-year securities reflected a flattening of the Treasury yield curve, which charts income yields on bonds of different maturities and traditionally slopes upwards. “The yield curve is pointing to heightened economic slowdown risk,” said Steve Englander of Standard Chartered.
In Asia, Hong Kong’s Hang Seng index rose 1.1 per cent and Japan’s Topix gained 0.9 per cent.
