US stocks dropped amid a ramp-up in concern over higher energy costs, as investors assessed the impact of the surge in commodity prices on inflation and economic growth. The dollar extended gains, while Treasury yields pulled back from session highs.
The SandP 500 fell for a third day, down 1.4 per cent as all but two of the 11 major industry groups declined, with tech and social media stocks contributing the most to losses. The Nasdaq 100 slid 1.5 per cent. Oil jumped on the prospect of a ban on Russian supplies, with Brent crude rising as high as $139 (€127.62) a barrel, before trading closer to $120. European gas, palladium and copper hit all-time highs.
The Biden administration is considering whether to ban the import of Russian oil and energy products, a move that could add to economic pressure as more companies pull out of the country in response to Moscow’s invasion of Ukraine. European Union governments were divided over whether to join the US.
“The longer oil prices and inflation remain elevated -- and thereby threaten an early demise of this economic expansion and bull market -- the more investors will trim their exposure to equities,” wrote Sam Stovall, chief investment strategist at CFRA. “Investor uncertainty should elevate the angst.”
The US bond market’s 10-year inflation forecast jumped to a record 2.785 per cent, while the yield on the benchmark Treasury bond rose 4 basis points to 1.77 per cent. A gauge of the dollar rose for a third day, trading at the highest since 2020.
Ukrainian and Russian officials will meet for a third round of talks, but hopes for progress in the meeting later on Monday are low as Russian leader Vladimir Putin says Kyiv must to agree to his demands if fighting is to end. Putin signed a decree allowing the government and companies to pay foreign creditors in rubles, seeking to stave off defaults while capital controls remain in place. Still, some holders of a $1.3 billion Gazprom PJSC bond due on Monday said they received payment in dollars.
More businesses pulled back on their operations in Russia, including streaming giant Netflix Inc. and social-media service TikTok, which is owned by China-based ByteDance Ltd.
Meanwhile, China warned the US against trying to build what it called a Pacific version of Nato, while declaring that security disputes over Taiwan and Ukraine were “not comparable at all”.
Inflation
The global economy was already struggling with high inflation due to the pandemic. The Federal Reserve and other key central banks now face the tricky task of tightening monetary policy to contain the cost of living without upending economic expansion or roiling risky assets.
“For the US economy, we now see stagflation, with persistently higher inflation and less economic growth than expected before the war,” Ed Yardeni, president of Yardeni Research, wrote in a note. “For stock investors, we think 2022 will continue to be one of this bull market’s toughest years.” – Bloomberg
