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Stocks stay sluggish, oil slips further, dollar creeps higher ahead of NFP

XM.COM

  • Stocks make mixed start to Q2 after worst quarter in two years as Ukraine woes linger
  • Dollar main beneficiary of increased risk-off as yen sinks again, US jobs report in focus
  • Oil prices hit two-week low after Biden’s supply boost

Markets downbeat as peace hopes ebb

After a promising start to the week amid the optimism that a ceasefire agreement between Russia and Ukraine is within reach, the market mood has soured somewhat as the two sides seem no closer to ending the fighting. The fallout from the Ukraine crisis has sparked chaos in commodity markets, fuelling already spiralling energy prices, as well as triggering a massive rally in a wide spectrum of agricultural, metal and other raw material prices.

Businesses were already facing surging input prices before Russian forces stormed into Ukraine and the West imposed crippling sanctions on Moscow. They now additionally have to contend with an even more challenging trading environment, not just from supply chain and cost perspective, but also from tightening financial conditions.

The Fed is on course to deliver a rare double rate hike in May and other major central banks are also on a tightening path. Although the war has prompted some caution among policymakers, the Fed’s policy path is the least likely to get derailed by the ensuing turmoil in financial markets.

Stocks inch higher after quarterly loss

This probably also explains why US equities outperformed European ones during March. But it is also an indication that financial conditions in the US remain relatively loose despite the jump in Treasury yields across the entire curve.

The S&P 500 finished the first quarter with losses of 5%. Although this was the worst performance since the same quarter in 2020, it’s a sharp turnaround from the more than 12% loss registered earlier in March.

In the immediate term, doubts about the progress cited initially from this week’s peace talks are weighing on sentiment. Russian and Ukrainian negotiators will continue to talk via videoconference today, so peace hopes haven’t been completely dashed.

Putin’s plan is clearly not going according to plan amid reports of heavy casualties, the calling of reinforcements and regrouping of troops. Russia now appears to be focusing its offensive on the southeast of Ukraine and its forces have reportedly withdrawn from Chernobyl.

Some investors may see this as a sign that it’s only a matter of time before a ceasefire agreement is hashed out and this could be limiting the bout of risk-off that emerged mid-week.

Today, however, European stocks and Wall Street futures are edging up, with the latest US jobs report high on the agenda.

America’s jobless rate is expected to have declined to a new post-pandemic low of 3.7% in March. With Fed rate hike bets for 2022 already looking overdone, stronger-than-expected numbers might not make a huge difference to tightening expectations but could increase confidence about the US economy, lifting the mood.

Dollar inches higher as yen resumes slide

The US dollar is extending its gains today against a basket of currencies, mainly on the back of the weaker Japanese yen, as both the euro and pound are more or less flat on the day.

The yen was likely boosted by fiscal year-end repatriation flows by corporate Japan this week, offsetting the drop in yields when the Bank of Japan was busily snapping up Japanese government bonds.

Dollar/yen has climbed back above the 122 level today, while the euro has slipped back below $1.11.

Eurozone inflation shot up more than expected in March, hitting a new all-time high of 7.5% year-on-year according to the flash reading, putting the ECB in a bind as the alarming figure raises the prospect of stagflation for the euro area.

Investors might also be worried by Russia’s threat to cut off gas supplies to Europe unless buyers from the continent pay for them in roubles.

Oil slumps as crude reserves are unleashed

Meanwhile, in commodity markets, gold was showing no sign of breaking out of its more than two-week old range. The precious metal is slightly down today as Treasury yields are ticking higher.

But oil prices were attempting to erase their session losses, with Brent crude futures last trading flat at $104.7 a barrel, having earlier brushed a two-week low.

WTI futures are testing the critical $100 a barrel level after President Biden yesterday announced that the US will release one million barrels a day for six months, amounting to 180 million, from the country’s strategic petroleum reserve.

Moreover, the International Energy Agency is due to hold an emergency meeting later today for other countries to also release more of their reserves in a bid to alleviate the pain on consumers from soaring fuel prices.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-stocks-stay-sluggish-oil-slips-further-dollar-creeps-higher-ahead-of-nfp-157922
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