US and European stocks’ winning streak ended on Wednesday, while energy prices climbed, as doubts gathered over the possibility of a peace deal in Ukraine.
Wall Street’s benchmark S&P 500 index, which closed 1.2 per cent higher on Tuesday to mark its fourth consecutive session of gains, dipped 0.3 per cent. The technology-focused Nasdaq Composite also lost 0.3 per cent.
Europe’s regional Stoxx 600 index, which closed on Tuesday at its highest level since February 17 after Moscow said it would reduce its military operations near Ukraine’s capital, Kyiv, fell 0.6 per cent and Germany’s Xetra Dax lost 1.4 per cent.
The moves came as traders took in a warning from Ukrainian president Volodymyr Zelensky that the nation should remain vigilant over Moscow’s claims of de-escalation, following a round of peace talks on Tuesday, and Germany moved towards rationing gas in preparation for a potential halt in Russian shipments.
Russia’s rouble weakened 4.5 per cent against the US currency, to Rbs83.8 per dollar. Brent crude meanwhile added 3.5 per cent to $114 a barrel. Futures contracts linked to TTF, Europe’s wholesale gas price, added 12 per cent to €119 a megawatt hour, almost seven times their level of a year ago.
“After yesterday’s optimistic tone regarding a potential ceasefire,” analysts at Bespoke Investment Group said in a note to clients, “much of that optimism has been walked back”.
Global equities have recovered from a bout of panic selling in early March, prompted by Russian president Vladimir Putin’s invasion of Ukraine, with the FTSE All World index trading at its highest level since February 11. But investors widely see the bounce back as vulnerable to companies’ earnings being hit by elevated inflation or central banks raising borrowing costs to contain soaring prices.
“It is too soon from a portfolio positioning perspective to start really preparing for a recessionary shock,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. “But there is more risk because the guarantee of [central bank] support is no longer there.”
In the US, money markets have priced in more than seven interest rate rises this year. The European Central Bank is also rolling back its ultra-supportive, pandemic-era monetary policies.
March has marked the worst month for Treasuries since July 2003, with the Bloomberg US Treasury Aggregate index dropping 3.5 per cent.
On Tuesday, the two-year Treasury yield had briefly risen above that of the benchmark 10-year US note, a rare event that has historically preceded recessions.
“We may be seeing this equity rally for the wrong reasons,” said César Pérez Ruiz, chief investment officer at Pictet Wealth Management.
“People who were holding bonds and worried about losing money switched to equities to protect themselves,” he added, noting that shares in companies with adequate pricing power to pass on inflationary pressures to customers might perform well “as long as economic growth is here”.
On Wednesday, the yield on the two-year Treasury note rose 0.02 percentage points to slightly under 2.34 per cent, close to its highest since May 2019. The benchmark 10-year yield sat above the two-year, at 2.42 per cent.
In Asian equity markets, Hong Kong’s Hang Seng share index rose 1.4 per cent, after gains on Wall Street on Tuesday. Japan’s Nikkei 225 fell 0.8 per cent. The yen rose 0.8 per cent to 121.8 per dollar, having hit a seven-year low against the US currency on Monday.
