May 25, 2022

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Pre-market stock trading: Wall Street starts adjusting Ukraine

The Fed raised rates, but can it catch up with inflation?
The S&P 500 rose 1.2% on Friday. The Dow, up nearly 275 points, or 0.8%, had its best week since November 2020, rising 5.5%. The Nasdaq, which rose 2.1% Friday, is up 8% this week. This is her biggest weekly gain since November 2020 as well.

The International Energy Agency also warned this week of the biggest oil supply crisis in decades. Analysts worry that the war in Ukraine could lead to global food shortages. The West continues to announce new sanctions targeting Russia.

The energy, metals and currency markets have responded to these seismic events with extreme volatility. Nickel prices fell sharply after a week-long halt in trading in London.

But the stocks are charting their own course, suggesting investors may be starting to tune in to the war in Ukraine.

“Ultimately, most asset classes seemed to raise their hands and go with what fits their narrative,” said Jeffrey Haley, chief market analyst at OANDA.

He added that “continued bullish busts in the stock market” pushed stocks higher on Thursday after positive manufacturing and labor market data in the US.

However, there may be some logic behind the stock’s movements.

Fed entry: The US central bank took a more hawkish tone at its meeting this week than many investors expected. The median forecast from policy makers is now seven price increases this year, and three more in 2023.

However, stocks rose. Analysts at UBS don’t see this as inconsistent. They gave three reasons:

Federal Reserve Chairman Jerome Powell convinced investors that the US economy is strong enough to sustain higher rates. He said economic data continued to strengthen, and the labor market is very tight.

The bond market indicates weaker growth ahead. But a recession, if it occurs, could take years.

Stocks often rise when the Fed starts raising interest rates. Since 1983, the S&P 500 has returned 5.3% in the six months following the first Fed rate increase in the cycle, according to UBS.

The bank’s analysts wrote: “Investors are advised to prepare for higher rates while continuing to deal with the equity markets. We prefer hedging strategy and selective exposure to stocks over risky assets.”

They said the energy stocks provide a hedge against the risks of war in Ukraine. Financial stocks also tend to rise when interest rates go up.

Russia creeps closer to avoiding default

There are signs that Russia may avoid a default…for now.

According to Reuters, citing anonymous sources, some creditors who had been waiting for $117 million in Russian interest payments since Wednesday have now received the money.

Standard & Poor’s Global said in a statement on Thursday that Moscow attempted to repay the amount earlier this week, but that the bondholders did not receive the money immediately due to “technical difficulties related to international sanctions.”

JPMorgan processed the payments, and transferred them to Citigroup, the payment agent responsible for distributing the money to investors, the Financial Times reported.

If not all investors get their money before the 30-day grace period expires, it will be considered default. Russia has not missed the repayment of international debts since the Bolshevik Revolution.

But she is not out of the woods yet.

“We believe that debt service payments on Russian Eurobonds due in the next few weeks may encounter similar technical difficulties,” Standard & Poor’s said. “At this point, we consider Russia’s debt to be highly vulnerable to non-payment.”

Standard & Poor’s lowered its rating on Russia’s sovereign debt from CCC to CC from CCC, which is only two notches above the default.

Next: Russia has to repay debts totaling $168 million on March 21 and March 28, but creditors have agreed to accept euros, pounds, francs or rubles as payment when they buy those bonds.

The next big tests come on March 31, when Russia repaid $447 million, and April 4, when it has to pay more than $2.1 billion on two notes. These payments can only be made in dollars.

Read more: Defaults are an obscure area in the global economy. My CNN Business colleague, Alison Morrow, has a Big breakdown here.

The end of cheap mortgages

Mortgage rates rose above 4% for the first time since May 2019, a sign that the era of super cheap home loans may be over.

The 30-year fixed-rate mortgage averaged 4.16% in the week ended March 17, up from 3.85% the week before, according to my CNN Business colleague Anna Bahney.

Fed action: Interest rates rose as the Fed moved to rein in high inflation. The central bank announced on Wednesday that it would raise interest rates for the first time since 2018.

Mortgage rates are not directly linked to the federal funds rate. Instead, they track the yield on 10-year Treasuries, which is influenced by factors including investor reactions to the Fed’s moves and inflation.

“The Fed raising short-term rates and signaling further increases means mortgage rates should continue to rise throughout the year,” said Sam Khater, chief economist at Freddy Mac.

High inflation and uncertainty in Ukraine also affect rates.

“Inflation is unlikely to slow any time soon,” said George Ratio, director of economic research at Realtor.com. “Investors are reacting to the escalating war in Ukraine and expect renewed supply chain disruptions to add additional pressure on consumer prices.”

He said all of these factors will continue to drive mortgage rates higher in the coming months. This means that one of the main drivers of home sales over the past two years – very low mortgage rates – is starting to dry up.

“The days of interest rates below 3 percent are firmly behind us, and we still have to work out the market fundamentals of supply and demand,” Ratiou said.

next one

US Existing Home Sales data will be released at 10:00 AM ET.

Next week comes: Nike, General Mills and Darden restaurants earnings.