European stocks rose on Tuesday as the prospect of progress in peace talks between Russia and Ukraine boosted market sentiment.
The regional Stoxx 600 share index added 1.3 per cent, with gains for carmakers and tech stocks driven by hopes that a cessation of hostilities would ease supply chain disruptions. Bank shares also rose.
London’s FTSE 100 rose 1.1 per cent and Germany’s Xetra Dax index added 1.7 per cent. Futures markets implied Wall Street’s S&P 500 share index would open 0.5 per cent higher.
Envoys from Moscow and Kyiv were meeting in Istanbul on Tuesday to discuss a possible peace deal that would involve Ukraine abandoning its drive for Nato membership in exchange for security guarantees and the prospect of joining the EU.
Many investors expect the effects of the war, including spiralling prices of commodities and metals produced in both countries, to continue weighing on financial markets, however.
“The tragic war in Ukraine has resulted in a global energy shock. We see this increasing inflation, pressuring consumers and hurting growth, especially in Europe,” the BlackRock Institute wrote in a note to clients.
Guilhem Savry, cross-asset manager at Unigestion, said that while short-term, trend-following hedge fund strategies were at present buying equities, “this could reverse quickly as [economic] fundamentals are not supportive”.
He added: “We are in a short-term positive cycle that will change once there is a negative geopolitical event or negative economic growth data.”
Brent crude, the international oil benchmark rose 0.3 per cent to $112.75 a barrel, having dropped in the previous session after Chinese authorities reacted to rising Covid-19 cases by imposing extreme lockdown measures in Shanghai. Oil prices have swung violently over the past week, commonly with intraday moves of at least 5 per cent, while Brent rose to almost $140 a barrel earlier this month.
In debt markets, shorter-dated US Treasuries remained under pressure as traders bet on the Federal Reserve raising interest rates rapidly this year to battle surging inflation. The Treasury yield curve, which charts the returns on bonds of different maturities and traditionally slopes upwards, continued to flatten as investors avoided near-term economic risk.
Price action in the Treasury market has also been exaggerated by a lack of liquidity — the ease with which traders can buy and sell securities — after investors turned bearish on bonds, whose fixed-income payments are eroded by inflation.
The yield on the two-year Treasury note, which moves inversely to its price and tracks monetary policy expectations, added almost 0.06 percentage points to 2.44 per cent, 1.7 percentage points above its level at the end of 2021. The benchmark 10-year yield added 0.03 percentage points to 2.51 per cent.
“The US Treasury curve has completely fallen off the rails with brutal liquidity conditions and downright strange price action,” said analysts at Bespoke Investment Group.
“This sort of huge front-end sell-off while the long end rallies tends to come during periods of very high volatility or when the Treasury curve is bear-flattening into a recession.”
In Asia, Hong Kong’s Hang Seng index rose 1.1 per cent and Japan’s Topix gained 0.9 per cent.
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