Market sentiment sours on lingering geopolitical risks
In the currency space, the dollar got off to a shaky start despite rising Treasury yields while gold extended its losses, approaching $1,900. WTI oil prices are also down, falling below $100 as China imposed shutdowns in key cities. European futures point to a negative open as hopes fade for a ceasefire in Ukraine, with risk sentiment potentially returning to Wall Street, which ended mostly lower on Monday.
A sense of caution continues to shroud financial markets amid ongoing geopolitical tensions, rising Covid-19 cases in China, inflation fears and impending US monetary policy tightening. Earlier this morning, data out of China beat market expectations, but that failed to shake the jitters and general gloom. That could be this week’s theme, as current themes overshadow economic data. With investors likely to maintain a defensive stance against riskier assets ahead of Wednesday’s Federal Reserve meeting, equity markets could expect further sanctions. The S&P500 remains under pressure and has lost more than 4.5% this month. A strong daily close below 4150 could signal further downside, especially if risk aversion remains the name of the game.
All eyes are on the Federal Reserve meeting
The main risk event this week will be the Federal Reserve’s monetary policy decision on Wednesday. Markets widely expect the central bank to raise interest rates by 25 basis points, as Federal Reserve Chairman Jerome Powell recently signaled. It would be the Fed’s first hike since 2018.
Given that the conflict in Ukraine has left investors worried about global growth prospects, the political path beyond March could be clouded by the fog of war. Much attention will be paid to the economic projections (“dot plot”) and the press conference for further clarity on future rate hikes. As US inflation hit a new 40-year high of 7.9% in February, the Fed remains embroiled in an uphill battle against rising prices. It will be interesting to hear Powell’s thoughts on recent events and how the Fed plans to weather this current storm.
The dollar could appreciate if the Fed takes an aggressive approach to higher interest rates despite lingering geopolitical risks. If the central bank adopts a more cautious tone and economic forecasts are revised lower, this could lead to dollar weakness.
Oil prices prolong the sell-off
Oil benchmarks were under pressure this morning, with WTI dipping below $100 as investors weighed demand risks from China-imposed lockdowns and ceasefire talks between Ukraine and Russia. Russia.
The global commodity should remain sensitive to geopolitical risks and supply-side factors, especially as oil imports from Russia are still banned. It may be wise to keep a close eye on the Energy Information Administration (EIA) report released on Wednesday. Another weekly drop in crude inventories could limit downside losses for oil.
Commodities Spotlight – Gold
Gold stumbled in Tuesday’s session under renewed pressure as Treasury yields rose ahead of an expected rate hike by the Federal Reserve.
While heightened geopolitical risks and general uncertainty have recently accelerated the flight to safety, the prospect of an interest rate hike by the Federal Reserve could lead to further losses. Given that prices have fallen nearly $70 since last Friday, the path of least resistance points south in the near term.
Ultimately, gold’s conclusion this week will be heavily influenced by the outcome of the Fed meeting, bond market movements and ongoing geopolitical tensions.
By Lukman Otunuga Senior Research Analyst
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