The International Energy Agency also warned this week of the biggest oil supply crisis in decades. Analysts are concerned that the war in Ukraine could lead to global food shortages. The West continues to announce new sanctions against Russia.
Energy, metals and currency markets reacted to these seismic events with wild fluctuations. Nickel prices fell sharply after trading was suspended in London for a week.
But stocks are on their way, which suggests that investors may be starting to turn their backs on the war in Ukraine.
“In the end, most asset classes seemed to raise their hands and choose what fit their narrative,” said Geoffrey Halley, senior market analyst at OANDA.
He added that “the ever-optimistic gnomes of the stock market” pushed stocks higher on Thursday after positive US manufacturing and labor market data.
However, there may be some logic to the stock movement.
Enter the Fed: The US central bank showed a more hawkish tone in its meeting this week than many investors expected. Politicians’ median forecast now calls for seven rate hikes this year and three more in 2023.
However, US stocks rose more than 1% on Thursday. UBS analysts don’t see this as inconsistent. They cited three reasons:
Fed Chairman Jerome Powell convinced investors that the US economy is strong enough to withstand higher rates. According to him, economic data continues to strengthen, and the labor market is very tight.
The bond market suggests that weaker growth is ahead. But a recession, if it comes, could still be years away.
Stocks often rise when the Fed starts raising interest rates. Since 1983, the S&P 500 has returned an average of 5.3% in the six months following the Fed’s first rate hike cycle, according to UBS.
“We advise investors to prepare for higher rates while remaining in the stock markets. We prefer a hedging strategy and selective participation in equities rather than an exit from risky assets,” the bank’s analysts wrote.
According to them, shares of energy companies provide protection against the risks associated with the war in Ukraine. Financial stocks also tend to rise when interest rates rise.
Russia moves closer to avoiding default
There are signs that Russia may avoid default… for now.
Some of the creditors who had been waiting for a $117 million Russia interest payment since Wednesday have now received the funds, Reuters reported, citing unnamed sources.
Moscow tried to make a payment earlier this week, but bondholders did not immediately receive the money due to “technical difficulties related to international sanctions,” S&P Global said in a statement Thursday.
According to the Financial Times, JPMorgan processed the payments and turned them over to Citigroup, the payment agent responsible for distributing money to investors.
If all investors do not receive their money before the 30-day grace period expires, this will be considered a default. Russia hasn’t missed a payment on its international debt since the Bolshevik Revolution.
But this is not yet the way out of the forest.
“We believe that debt service payments on Russia’s Eurobonds maturing in the next few weeks may face similar technical difficulties,” S&P said in a statement. “At this point, we believe that Russia’s debt is very vulnerable to default.”
S&P downgraded Russia’s sovereign debt rating to CC from CCC-, just two notches above default.
Next: Russia is due to repay a debt totaling $168 million on March 21 and 28, but creditors agreed to accept euros, pounds sterling, francs or rubles as payment when they bought these bonds.
The next big test will take place on March 31, when Russia is due to pay $447 million, and on April 4, when it is due to pay more than $2.1 billion on two securities. These payments can only be made in dollars.
Read more: Defaults are dark territory in the global economy. My CNN business colleague Allison Morrow has a big rift here.
The end of cheap mortgages
Mortgage rates climbed above 4% for the first time since May 2019, a sign that the era of super-cheap home loans may be over.
30-year fixed-rate mortgages averaged 4.16% in the week ended March 17, up from 3.85% the week before, my CNN business colleague Anna Bani reports.
Fed action: Rates rose as the Federal Reserve took action to curb rising inflation. On Wednesday, the central bank announced a rate hike for the first time since 2018.
Mortgage rates are not directly related to the federal funds rate. Rather, they track 10-year Treasury yields, which are influenced by factors such as investor reaction to the Fed and inflation.
“The Federal Reserve’s short-term rate hike and signaling further increases means mortgage rates should continue to rise throughout the year,” said Sam Hater, chief economist at Freddie Mac.
Rising inflation and uncertainty in Ukraine also affect rates.
“Inflation is unlikely to slow down anytime soon,” said George Ratiu, manager of economic research at Realtor.com. “Investors are reacting to the deepening war in Ukraine and expect new supply chain disruptions to put additional pressure on consumer prices.”
All of these factors will continue to drive up mortgage rates in the coming months, he said. This means that one of the main drivers of home sales over the past two years – ultra-low mortgage rates – is drying up.
“The days of interest rates below 3% are behind us and we have yet to resolve the market fundamentals of supply and demand,” Ratiu said.
Next
US existing home sales data will be released at 10:00 am ET.
Next week: Profit from Nike, General Mills and Darden Restaurants.