MARKET WRAPS
Watch For:
U.S. Producer Price Index for January; Canada Housing Starts for January.
Opening Call:
Stock futures rose following days of losses, while energy prices slumped and bonds sold-off, after reports that Russia was pulling back some troops from the Ukrainian border.
The threat of war between Ukraine and Russia has, in recent days, added a geopolitical element to investors' already troubled outlook. Warnings from the U.S. and its allies about the likelihood of a Russian invasion have grown louder, spooking investors concerned about the economic hit from such a conflict or the resulting sanctions on Russia's economy.
Those fears abated somewhat Tuesday, after Russia's Defense Ministry said some troops on the Ukrainian border were returning to their bases after completing training, according to Russian media.
"The market is believing what it is hearing in the headlines, but you do have to be careful with these things," said Hani Redha, a multiasset fund manager at PineBridge Investments. "We have to be cautious on news like this in the so-called fog of war."
Russia has been accelerating a troop buildup along Ukraine's border, in recent days. Russian lawmakers Tuesday will consider proposals to formally urge President Vladimir Putin to recognize the separatist-controlled regions of eastern Ukraine as independent states, a move that could justify an incursion into its neighbor. Russia has denied it plans to attack.
Russia is among the world's largest suppliers of oil, as well as the biggest exporter of wheat and a major producer of key metals, such as palladium, aluminum and nickel, while Ukraine is a key transit route for Europe's natural gas supplies.
"The biggest impact this thing has had has been in commodities and the feed through of that into inflation," said Mr. Redha. A conflict which pushes energy prices and inflation higher could push central banks to raise interest rates faster than planned, he added.
The U.S. Producer Price Index, which covers prices that suppliers charge businesses, is due at 8:30 a.m. ET, and could offer investors' further insight into inflation. Last month's figures showed price rises cooling, a sign that supply-chain bottlenecks may be easing.
Earnings season continues, with quarterly results due from companies including Marriott International ahead of the opening bell. Airbnb will post earnings after markets close.
Market Insight:
The fact that both equity and bond markets are declining is a problem, as traditional diversification does not work in this environment, said Michael Strobaek, global chief investment officer at Credit Suisse.
Another point of concern for him is that the reasons driving the setback are "serious and potentially long-term in nature," he said, pointing to reasons ranging from economic to geopolitical ones.
The economic drivers, such as the continued upward surprise in inflation that has forced central banks to change course are "quite well understood," but the geopolitical reasons--the escalation of tensions between NATO and Ukraine on the one side and Russia on the other, are "less predictable, complicated and more difficult to price for markets," Strobaek said.
Stocks to Watch:
Crypto platform Coinbase Global said it plans to add 2,000 employees in 2022, saying it sees "enormous product opportunities ahead for the future of Web3," a third-generation of the internet based off the blockchain.
Coinbase said it planned to add employees across its product, engineering, and design teams this year.
"We believe our industry is in its infancy and that building onramps for individuals to participate is critical to driving the next generation use case of crypto," wrote L.J. Brock, Coinbase's chief people officer, in a blog post.
"We're also expanding to include products that host user-generated content like NFTs, and we're excited about our ambitious plans for the future of Coinbase Wallet, enhancing security, ease of use, and accessibility."
Forex:
The dollar fell after Russian President Vladimir Putin signaled he remains open to a diplomatic solution to the country's standoff with Ukraine, reducing demand for safe havens.
Indications of a diplomatic resolution to the Ukraine crisis could help risk-sensitive currencies recover and weaken safe havens including the dollar, ING analysts said in a note.
However, the "narrative around frontloading of tightening by the Federal Reserve" should limit the dollar's depreciation in the near term even if the geopolitical risk is priced out, they say.
Bonds:
Yields on benchmark U.S. 10-year Treasury notes rallied to 2.035% from 1.995% Monday.
Bond investors seem to be clinging to the Fed's typical tightening playbook, Morgan Stanley Wealth Management's global investment committee said.
This means pushing up front-end interest rates, flattening the yield curve and assuming central bank success in quashing inflation, even if it risks a recession, it said.
Morgan Stanley Wealth Management remains in the camp that says inflation is likely to be stickier and more structural than in prior cycles, adding that it has been sceptical of the argument that the current situation is all about supply chains and will be cured rapidly.
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Julius Baer sees the 10-year U.S. Treasury yield at 2.1% on a three-month horizon, as the prospect of an early policy normalization puts upward pressure on yields, its analysts said.
An upside surprise to U.S. inflation in January suggests an early normalization of monetary policy, including a 50-basis-point rise in the policy rate at the Fed's next meeting in March, followed by a 25-basis-point rate rise at each of the May and June meetings, Julius Baer's analysts said.
"The higher-than-expected inflation reading for January; increases political pressure on the Fed to normalize its monetary policy stance without further delay," they added.
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The European Central Bank is still intending to reduce monetary policy accommodation in the coming months, but recent comments from ECB policy makers suggest that the aggressive exit that markets had started to price in was unrealistic, ABN Amro's economists said.
"We have therefore seen a co-ordinated campaign to push back on the speed and extent, rather than the general direction," they added. ABN Amro expects the ECB to end net asset purchases altogether in September, followed by a 10 basis point rise of the deposit rate in December 2022 and another 10 basis point rise in March 2023.
"After that we expect rate hikes to be aborted, or at least put on ice, with the deposit rate at -0.3% by the end of 2023," ABN Amro's economists said.
Commodities:
Oil and natural gas prices slumped as Russian state media reports that some Russian troops are pulling back, raising hopes that conflict with Ukraine can be avoided.
European natural gas futures also slump with Dutch prices, the European benchmark, falling over 5% to EUR76.50 a megawatt-hour, while U.K. gas prices fall over 5% to 182.75 British pence a therm.
The Russian Defense Ministry said some military units were returning to their bases after completing training, according to RIA Novosti. The reports were easing some investors' concerns that a conflict threatened to disrupt Russian supplies of energy and other commodities, said Hani Redha, a multiasset fund manager at PineBridge Investments.
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(MORE TO FOLLOW) Dow Jones Newswires
02-15-22 0612ET
