FILE PHOTO: Federal Reserve Chair Jerome Powell holds a news conference following the Federal Open Market Committee meeting in Washington, U.S., December 11, 2019. REUTERS/Joshua Roberts/File Photo

US Fed meet, Russia-Ukraine crisis to decide market course next week
World shares fall on Ukraine conflict, looming U.S. rate hikes

The stock market movement in the coming week will be guided by the decisions from the US Fed meet and new developments that may occur in the Russia-Ukraine crisis.

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Technically, the benchmark index Nifty has traded in a narrow range and formed inside bar candlestick on the daily chart. Moreover, it has been trading below Middle Bollinger Band formation, which indicates further resistance around 16,850 levels.

The markets this week witnessed a decent recovery amid volatility, surging over 2 per cent. It takes a breather after 4 weeks of slide. The beginning was downbeat, tracking news of war between Russia-Ukraine intensifying, which pushed crude to the $130 per barrel mark.

Interest Rates

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Investors may take the Federal Reserve’s first post-pandemic interest rate hike in stride. While uncertainty over the Ukraine crisis continues to hang over markets.

The Fed has clearly broadcast that it intends to raise its target fed funds rate by a quarter percentage point from zero. It is expected to announce that move at the end of its two-day meeting Wednesday. The central bank should also reveal new forecasts for interest rates, inflation and the economy.

There are a few economic reports of note in the week ahead. It includes the producer price index Tuesday, retail sales Wednesday and existing home sales Friday.

FOMC Meeting

Among the important event, he added, the US Fed policy meet outcome on March 16 will be closely watched as the majority expect a 25 bps hike. However, their commentary on the quantum of future rate hikes would be critical.

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Besides, the updates on Russia-Ukraine tension and its impact on crude will remain in focus.  We feel participants should continue with a cautious stance until the prevailing geopolitical tension further eases, the market analyst said.

Investors have ramped up expectations for an aggressive Fed posture in the face of the highest inflation in four decades. But the economists say the outlook has become muted by uncertainty over Ukraine, sanctions and surging commodities prices. The economists predict the Fed may raise rates by 1.25% this year, with rates reaching 2.5% in 2024.

Price Hike

Market pros see surging inflation as a catalyst that will keep the Fed on track to raise interest rates. However, uncertainty about the economic outlook could also mean the central bank might not hike as much as the seven rate increases that some economists forecast for this year.

Cabana expects Fed officials to forecast five hikes for 2022 and another four next year. The Fed previously anticipated three increases in both years. Cabana said the Fed could cut its forecast for 2024 to just one hike from the two in their last outlook.

Cabana said the markets are showing signs of concern around the uncertainty in Ukraine. For instance, the Treasury market is less liquid.

“We have seen that the Treasury market has become more volatile. We’re seeing bid-ask spreads have widened. Some of the more traditionally less liquid parts of the market may have become less liquid, like TIPS and the 20-year. We’re also seeing market depth thinning out,” he said. “This is all due to elevated uncertainty and lack of risk-taking willingness by market participants. I think that should worry the Fed.”

Any comments from the Fed on what it plans for its nearly $9 trillion balance sheet will also be important. Since officials have said they would like to begin to scale it back this year after they start hiking interest rates. The Fed replaces maturing Treasury bonds and mortgages as they roll off. It could slow that in a process Wall Street has dubbed “quantitative tightening,” or QT.

Oil Price

Oil prices settled higher on Friday but posted their steepest weekly decline since November. As traders assessed potential improvements to the supply outlook that has been disrupted by Russia’s invasion of Ukraine.

Crude prices have soared since the invasion, which Moscow calls a “special military operation.”This week, futures benchmarks hit their highest levels since 2008. They pulled back sharply as some producing countries signalled they may boost supply.

Brent crude futures rose $3.34, or 3.1%, on Friday, settling at $112.67 a barrel, after hitting a session low of $107.13. U.S. West Texas Intermediate (WTI) crude futures rose $3.31, or 3.1%, to settle at $109.33 a barrel, off the session low of $104.48.

Next week, Staunovo said, the focus will shift to oil market reports from the International Energy Administration (IEA) and the Organization of the Petroleum Exporting Countries (OPEC). Both have indicated the market should be oversupplied this year.

In the near term, supply gaps are unlikely to be filled by extra output from members of the OPEC and allies, together called OPEC+, given Russia is part of the grouping, Commonwealth Bank analyst Vivek Dhar said.

Some OPEC+ producers, including Angola and Nigeria, have struggled to meet production targets, limiting the group’s ability to offset Russian supply losses.

Sharp fall in commodities

Commodities have been on a rise for the last few days as Russia-Ukraine fighting fuelled concerns that supply from Russia may be impacted. While there has been no resolution of the dispute yet, market reaction has subsided to some extent as market players assess implication of the geopolitical development.

Russia is a major player in commodities market and increasing supply risks pushed commodities to multi-year highs and some to fresh all-time highs this week. In energy complex, WTI and Brent crude surged to 2008 highs while the European gas prices jumped to all-time highs.

In industrial metals, copper, nickel, aluminium surged to record high level while zinc tested 2007 highs. Amid other commodities, palladium and wheat also surged to record high levels. Meanwhile, gold jumped to August 2020 highs amid increased safe haven demand and increasing inflation concerns.

Commodities set fresh highs this week, however, the momentum has halted as market players assessed the Russia-Ukraine situation. Prospect of a resolution rose earlier this week as an aide to the Ukraine President indicated that the country may be willing to consider Russia’s neutrality demand if it gets security guarantees.

Hopes of a resolution, however, waned as meeting between Russia and Ukraine foreign minister failed to result in a break through.

Commodities rallied sharply in last few days and this has made it vulnerable to profit taking. We may see volatility continuing as market players assess demand supply implications as well as monetary policy stance of major central banks. However, supply risks are still looming large and a sharp fall may not come unless there are concrete efforts to resolve the dispute.

Focus is now shifting to the Fed meeting next week. Market players have reduced expectations that Fed may raise interest rate aggressively as geopolitical tensions challenge growth.

However, the Fed is expected to maintain aggressive stance with inflation out of control. The latest data showed that consumer price rose 7.9 percent on the year in February, the fastest pace in 40 years.