Asian share markets dropped Friday. This led to bets that U.S. interest rate hikes would be more aggressive and sent U.S. Treasury yields soaring.
Global shares fell on Friday due to rising concerns over Ukraine-Russia tensions, and the possibility of an increased timeline for U.S. Federal Reserve interest rate increases in response to decades-high inflation.
Benchmark Treasury yields fell, while German bond yields rebounded from the 2018 highs. Oil and gold prices rose.
After Washington claimed that Russia had gathered enough troops close to Ukraine to launch an invasion, Wall Street volatility increased and Washington urged Americans to flee the country within 48 hours. This was after Moscow had reacted to Western diplomacy.
While energy shares rose more than 2.8% due to rising oil prices, most of the major S&P 500 sector indices fell, mainly because technology and consumer discretionary led to a decline.
The Dow Jones Industrial Average fell 503.53 points or 1.43% to 34,738.06; S&P 500 lost 85.44 point, or 1.9%, at 4,418.64, and the Nasdaq Composite fell 394.49 percent, or 2.7%, to 13,791.15.
According to Bill Adams, Comerica Bank’s chief economist, “A Russian invasion would likely push energy prices higher and increase inflation.”
“From the Fed’s point of view, the inflationary effects a Russian invasion would have on global growth and higher energy prices would probably outweigh its negative consequences.”
The Labor Department’s Thursday report that showed U.S. inflation at its highest level in 40 years, causing markets to reel. This raised concerns that the Fed might raise key interest rates aggressively than many expected.
These concerns were raised after James Bullard, President of the St. Louis Federal Reserve, told Bloomberg that he desired a full percentage point increase in interest rates over the next three central banks policy meetings.
According to CME Group’s FedWatch Tool, financial markets fully price in a Fed rate hike of at most 25 basis points at its March 15-16 policy conference and they forecast a 71.5% chance for a 50-basis point hike.
“Until it happens, we really won’t be able to know what the Fed will do,” stated Tim Ghriskey of Ingalls & Snyder. “They have a lot of data to access between now and the next Fed Meeting.”
Ghriskey said that although there is little likelihood that the Fed won’t act, he believes we will see signs of moderate inflation between now-the Fed meeting and a 25 basis points hike.
European stocks suffered from interest rate sensitive tech shares as higher U.S. inflation increased the likelihood of a more aggressive Fed.
The pan-European STOXX 600 index ended 0.6% lower but gained 1.6% this week. This is its best performance since December-December.
The MSCI global equity index, which tracks shares from 49 countries, dropped 10.85 points, or 1.49% to 715.46. Stocks in emerging markets fell 0.85%.
The MSCI’s broadest index for Asia-Pacific shares, which is not Japan’s, closed 0.3% lower than the previous year. Japan’s Nikkei however rose 0.42%.
U.S. Treasury yields dropped on Friday. The benchmark 10-year yield fell below 2% due to geopolitical concerns. This was a day after it rose sharply on strong inflation data. [US/]
At 4:18 p.m. ET, the dollar index was up 0.288%.
The Japanese yen gained 0.60% against the greenback at 115.31 dollars, while sterling traded at $1.3547 at the time of writing, down 0.06%.
Following a warning by Christine Lagarde, President of the European Central Bank, that raising interest rates would only harm the economy, the euro fell 0.77%.
Oil prices rose 3% to seven-year highs due to Russia’s escalating threat of invading Ukraine. This was in addition to worries about tight crude oil supplies.
Brent crude futures closed at $94.44 per barrel, up 3.3% from their previous close. U.S. West Texas Intermediate crude crude oil rose 3.2% to $93.10 per barrel, and Brent crude futures settled at $3.03 (or 3.3%) higher.
U.S. Gold futures rose 0.3% to $1,842.10 on inflation fears and rising Russia-Ukraine tensions.
Spot gold prices rose by $36.0077, or 1.97% to $1,862.58 per ounce.
