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Markets claw back losses after worries spurred by Fed, Ukraine

Spooked by the Fed’s increasing hawkish turn, as well as military maneuvers in Eastern Europe, investors continued last week’s rout before steadying their hands to reclaim most of the day’s losses.  

MANHATTAN (CN) — What looked to be another miserable Monday turned out to be just a middling one as investors reclaimed heavy drops in equities from earlier in the day by the closing bell.

On the heels of last week’s rout, one of the worst since the Covid-19 pandemic began, all three indices fell precipitously early Monday, with the Dow Jones Industrial Average shedding 800 points in morning trading. An hour before the closing bell, though, markets were able to claw back those losses, with the Dow gaining 101 points, while the Nasdaq and S&P 500 had similar reversals of fortune.

The markets have been experiencing one of the worst Januarys on record, and the negativity early this morning seemingly was caused by two factors: the impending Federal Reserve meeting on Wednesday, during which the central bank may give more specifics on its plan to raise interest rates, and the growing turbulence in the Ukraine.

On the former, the Fed has recently taken a more hawkish approach to inflation after months of downplaying price increases. The central bank has changed its language on inflation from “transitory” to “elevated,” and the majority of its Federal Open Markets Committee members have called for as many as four interest rate hikes this year.

Tom Essaye of the Sevens Report noted on Monday morning that the market is in the midst of a “tightening tantrum” similar to the 2013 “taper tantrum” markets experienced after the Fed increased interest rates at the tail end of the Great Recession.

“The problem is that unlike 2013, the economy has an inflation problem, and the Fed is under enormous political pressure to rein in inflation,” he wrote. “Practically speaking, that means the Fed will allow stocks to decline more before providing rhetorical comfort than they did in 2013.”

Essaye said that, for markets to right themselves, the Fed needs to back off its hawkish rhetoric, corporate earnings need to improve, and tech stocks need to stabilize. “Powell dismissing balance sheet reduction in 2022 and/or downplaying the chance of four rate hikes would be very welcomed by the markets,” he wrote. “Conversely, if Powell leaves the door to balance sheet reduction open, and reaffirms four hikes, that will only keep the hawkish pressure on markets.”

The other major issue on investors’ minds is the political tension in Ukraine. On Wednesday, U.S. government officials stated they were considering deploying troops to Eastern Europe to deal with Russia’s mobilization of their own armed forces near the Ukrainian border, as well as were removing nonessential personnel from its embassy in Kiev.

“These concerns are outweighing and overshadowing this week’s Federal Reserve rate meeting,” Michael Hewson, chief market analyst at CMC Markets, wrote in an investor’s note. “And while we can expect to see the U.S. central bank confirm that a March rate rise remains in the cards, anything more than that is likely to be a big ask, given events currently playing out in Europe.”

Markets abroad already have felt the sting of the Ukrainian crisis, with Germany’s DAX falling 3.8% and nearly dropping under 15,000 points for the first time since early October, the French CAC losing just shy of 4%, and the pan-European Stoxx600 declining 3.8%.

Hewson said the political tensions have hampered markets’ abilities to move higher than they would otherwise. “For several years, the markets have become accustomed to buying the dips no matter the fundamental backdrop,” Hewson wrote. “However, recent events appear to be seeing a significant loss of confidence in this mindset.”

Recent lackluster corporate earnings, primarily from investment banks, have also failed to prop up markets as they had done in the past. An additional raft of earnings this week, including key Big Tech players Apple and Microsoft, as well as General Electric, could help reverse the recent bear-market tendencies.

Additional good news on the virus front — showing that cases of the omicron strain of Covid-19 are falling just as quickly as they rose, and predictions that the coronavirus pandemic may be over later this year — could also be a boon to markets.  

Brad McMillan, chief investment officer at Commonwealth Financial Network, wrote on Friday that the worst-case scenario indicates that markets will drop further but that they likely won’t crash. That is, he wrote, unless there is a systemic crisis, economic collapse or drastic spike in interest rates. “A crash could happen, but this is what would have to precede it,” he wrote.

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