Global investors took some comfort from prospects for any potential peace deal in Ukraine Tuesday but a strong sense of skepticism tempered gains in risk assets.
European stocks fared best with a more modest rise seen in the U.S., and oil quickly pared an initial slump. A rebound in Treasuries and the yen underscored the fact that it was a non-traditional risk-on move.
In addition to skepticism over Russia’s intentions, investors were mindful of a closely-watched recession signal in the U.S. bond market where a key yield gap turned negative.
Here are the views of some market participants on the current state of play:
Grain of Salt
“As with most everything that comes out of the Russian side, these comments needed to be taken with a grain of salt,” said Stephen Stanley, chief economist at Amherst Pierpont. “The Russians have indeed retreated somewhat from their furthest incursions toward Kyiv, but this appears to reflect their inability to hold the ground they initially gained and a response to Ukrainian counterattacks. U.S. officials confirmed that Russia has only moved a small number of troops away from Kyiv and suggested that nothing the Russians say can be trusted or taken at face value.”
Pain Trade
“It’s clearly a de-escalation, which the market was increasingly pricing, and it’s clear that higher equities was probably the pain trade for the market given sentiment and positioning was quite bearish amid the macro headwinds (i.e. Fed hiking and tightening of financial conditions),” said Chamath De Silva, senior portfolio manager at BetaShares Holdings in Sydney. “I still feel that technical factors are what’s driving equities right now. For example, the VIX dropping below 20 has probably created mechanical buying just due to the various tail-wagging-the-dog options dynamics.”
“Fixed income is telling a very different story from equities,” he added. The yield pullback could be signaling “a moderation of medium-term inflation pressures from a de-escalation of geopolitical risks, hence a long-end rally.” It could also mean “a continuation of the flattening impulse as growth and inflation expectations are likely to moderate on the back of an aggressive Fed.”
Equities Encouragement
“Equity markets continue to need only the slightest encouragement to push on up, and the Ukraine-related headlines have spurred a 3% rally in the Eurostoxx 50 which has in turn fed a stronger U.S. market” said Ray Attrill, strategist at National Australia Bank Ltd.
