Market snapshot: relief rally after Ukraine tension eases

Our head of markets assesses the impact of an apparent de-escalation of tension between Russia and Ukraine, as high inflation remains a concern for investors on both sides of the pond.

One of the twin pressure valves gripping the market has been slightly released, while the other remains strongly in evidence.

Apparent signs of a de-escalation of tensions between Russia and Ukraine lifted sentiment, while also resulting in a drop in the oil price on the back of lesser supply concerns. The withdrawal of some Russian troops seems to have been accompanied by comments that the door remained open for diplomatic discussions, which was sufficient to prompt a relief rally.

On the other hand, the current elevated level of inflation remains a real concern on both sides of the pond.

US producer prices rose once more, implying that high inflation is much less transitory than had been anticipated and that, equally, it will need to be dealt with aggressively by a Federal Reserve, which may currently be behind the curve. The latest Fed minutes are due to be released later today, and will be keenly analysed by investors seeking a nuance on the central bank’s latest thinking on its tapering programme, rate hikes and its own view on inflation prospects. Meanwhile, in the UK the latest inflation reading has also confirmed that higher energy costs, rising wages, ongoing supply chain disruptions and stronger demand have all conspired to keep upward pressure on prices in place.

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Separately news that US cases of Covid had declined 80% from a January peak brought the reopening trade back into focus, with strong gains for stocks in the airline and hotel sectors. With the reporting season now beginning to wind down, the general consensus is that the results have been a success, although clearly overshadowed by subsequent geopolitical and economic developments.

Despite the rallies within the major indices, in the year to date the Dow Jones remains down by 3.7%, the S&P 500 by 6.2% and the Nasdaq by 9.6%.

The palpable sense of relief following the apparent easing of tensions also spilled over to Asian markets, and to the UK in turn. The initial spike in share prices was blunted by the high inflation print, which will keep the pressure on for subsequent interest rates by the Bank of England until such time as it can see sufficient light at the end of the tunnel.

Over the next couple of weeks, the UK market plays host to a raft of company reports, not least of which will be the full-year releases from the banks. As ever, any strength in the numbers will be scrutinised, as will the guidance and outlook comments which should shed further light on the current trading situation on the ground. In the meantime, the cyclical and defensive qualities of FTSE 100 constituents continues to provide something of a shield from wider pressures, with the index having risen by 3% in the year to date.

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