US and European shares pull back as traders weigh Russia-Ukraine developments

US and European stocks’ recent winning streak ended on Wednesday, as doubts over the prospect of a peace deal in Ukraine knocked confidence and drove up energy prices.

Wall Street’s benchmark S&P 500 index, which had risen 4 per cent over the previous four sessions of consecutive gains, slipped back 0.6 per cent, while the technology-focused Nasdaq Composite fell 1.2 per cent.

Europe’s regional Stoxx 600 index fell 0.4 per cent, having closed on Tuesday at its highest level since February 17. Germany’s Xetra Dax lost 1.4 per cent.

Tuesday’s gains had been encouraged by news that Moscow planned to reduce its military operations near Ukraine’s capital, Kyiv. Later on Tuesday, however, Volodymyr Zelensky, Ukrainian president, warned the nation should remain vigilant about Russia’s intentions. In a sign of the continued tensions, Germany and Austria on Wednesday took steps toward rationing gas due to a dispute over payments for shipments from Russia.

The dollar weakened 3.9 per cent against the Russian rouble to Rbs84 per dollar. Brent crude, meanwhile, added 2.9 per cent to $113.45 a barrel. Futures contracts linked to TTF, Europe’s wholesale gas price, added 11 per cent to €118 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 selling prompted by the beginning of Russia’s invasion, with the FTSE All-World index trading at its highest level since February 11. But many investors believe the market remains vulnerable given the threat of rising inflation and higher interest rates to the earnings and valuations of companies.

“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, futures markets show investors expect the Federal Reserve to raise rates by at least a further 2 percentage points by the end of the 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 briefly rose above that of the benchmark 10-year 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 dipped 0.04 percentage points to 2.31 per cent. The benchmark 10-year yield sat slightly above the two-year, at 2.35 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 dollar fell 0.9 per cent against the yen to ¥121.8 per dollar, having hit a seven-year high against the Japanese currency on Monday.

*This story has been amended to reflect that the Russian rouble rose in value on Wednesday

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