Geopolitical risks continue to weigh on US stocks
US equity futures came under pressure in Asia trade as Treasuries rallied along with the US dollar. The Japanese Yen and Gold traded higher; meanwhile, oil prices recovered from their weekly low tested on Wednesday.
The markets have been driven by multiple factors lately. Inflation data, interest rates projections, and earnings were the main drivers. However, geopolitical tensions over Ukraine have become the center of investors' attention over the past few days. Pricing geopolitical risks are tricky, which explains the sharp swings in global bond and equity markets.
Earlier this week, markets rallied on news that Russia was pulling back some troops from areas adjacent to Ukraine after concluding drills. Still, Kyiv, NATO, and the US say there is no evidence of Russian troops retreating. In new developments, Russian-backed separatists accused Ukraine's government forces of opening fire on their territory over the past 24 hours, suggesting that tensions remain high.
Minutes from the Federal Reserve released yesterday had little impact on markets as they contained no additional guidance on the policy trajectory. Investors are already pricing six rates hikes by year-end, but the probability of a 50 basis points increase on the March meeting shrunk from over 60% to 40%. In fact, markets have interpreted the minutes as slightly "dovish" relative to their expectations, which led the US dollar to retreat, and US stocks to bounce immediately after their release.
No one knows with certainty where interest rates will reach by year-end, nor the pace of the Fed's balance sheet reduction. Inflation may stay stubbornly high or begin to subside over the upcoming months, which would be the key driver for Fed officials. Hence, expect markets to remain sensitive to every tier one economic report and speeches from monetary policy markets. St. Louis Fed President James Bullard will speak again today after saying earlier this week the Fed needs to front-load rates raises amid inflation surge. We will also hear from Cleveland Fed President Loretta Mester.
While markets remain guessing the pace of rate hikes, developments on the Russian-Ukrainian boarder will continue to be the main driver for stocks, bonds and oil.