By Geoffrey Smith
Investing.com -- The Kremlin digs in after President Joe Biden's gaffe calling for Vladimir Putin's removal from power. Bonds continue to sell off as the yield curve points to a growth slowdown. Tesla (NASDAQ:TSLA) is looking at a stock split while Apple (NASDAQ:AAPL) is reportedly looking at cutting production of some products due to weakening demand. Bitcoin closes in on a new high for the year and oil falls as Shanghai locks down (in stages) for a week. Here's what you need to know in financial markets on Monday, 28th March.
1. Kremlin digs in after Biden comments; Zelensky talks peace conditions
Hopes for a quick peace in Ukraine took a blow at the weekend after U.S. President Joe Biden called for the removal of Russia’s Vladimir Putin from power. While his comments at the end of a speech in Poland pledging support for Ukraine’s independence were unscripted, they were clearly intentional.
The comments are likely to strengthen suspicions, both in Russia and elsewhere, of a secret U.S. agenda to pursue regime change, although the State Department and the White House both stated later that this is not the case.
Separately, Ukrainian President Volodymyr Zelensky told independent Russian reporters that he would be willing to accept permanent neutrality as a basis for peace, as long as it was guaranteed by third parties. He also said he would be willing to have separate negotiations about the status of eastern Ukraine and Crimea, removing a further obstacle to peace talks. The Kremlin poured cold water on such suggestions, a spokesman saying that a meeting between the two presidents would be “counter-productive” although it noted that diplomats will resume their meetings in Istanbul on Tuesday.
2. Bond selloff continues, flattening curve further
Two-year U.S. bond yields hit their highest level in nearly three years overnight, as the repricing of Federal Reserve policy moves in response to rampant inflation continued.
The United States 2-Year Treasury yield touched 2.41% before easing to 2.37% by 6 AM ET (10:00 GMT), still up 7 basis points on the day. Ten-year yields however, were largely stable, rising only 1 basis point to 2.50%. As such, the spread between 2- and 10-year yields has narrowed to only 13 basis points, the least since the start of the pandemic. Flatter and/or inverted yield curves typically tend to indicate a growth slowdown in the future. However, their usefulness as a predictor of recessions is often disputed.
Analysts have been falling over themselves to revise their expectations for Fed rate hikes higher after a string of comments last week from Chair Jerome Powell and others warning of the possible need for half-point rises rather than the quarter-point ones previously suggested.
3. Stocks set to open mixed; Apple, Tesla news in focus
U.S. stock markets are poised to open mixed later, with concerns about the rapid selloff in bonds – which will raise capital costs for the economy at large - finally starting to weigh on equity markets that had defied gravity during the rout last week.
By 6:20 AM ET, Dow Jones futures, S&P 500 futures and Nasdaq 100 futures were all effectively flat, after two straight weeks of solid gains.
Heavyweights look likely to dominate proceedings later, with Apple stock down 1.8% on a report that it will cut production of Air Pods in response to weakening consumer demand, while Tesla stock was up 5% after the electric vehicle maker said it wants to carry out a stock split, which could make the stock more attractive to small investors.
Elsewhere, wholesale inventories data for February are due at 8:30 AM ET.
4. Bitcoin close to 2022 high as BoJ allows yen to weaken
Bitcoin closed in on a new high for 2022, as action from the Bank of Japan revived one of the classic arguments for holding crypto rather than fiat currencies. By 6:20 it was at $47,204, up 6% on the day.
The BoJ intervened heavily in Japanese bond markets overnight, saying it would buy unlimited amounts of bonds over the next four days to keep long-term yields at its policy target rate. As such, the BoJ strengthened suspicions that it prefers to devalue the yen rather than contain inflation.
The yen hit a six-year low of 125.08 against the dollar as a result of the intervention. The BoJ’s action backs up a string of comments in the last week by BoJ officials that was conspicuously relaxed about the yen’s decline on the FX markets.
5. Oil falls on Shanghai lockdown
Crude oil prices fell sharply on fears for the trajectory of Chinese demand, as the city of Shanghai announced rolling lockdowns for mass Covid-19 testing over the next week that will affect 25 million people.
By 6:30 AM ET, U.S. crude futures were down 4.2% at $109.11 a barrel, while Brent Futures, the global benchmark, were around $113.03 a barrel, down 3.7%.
The measures will not close the city’s port, or indeed many of its factories (although Tesla’s factory in Shanghai is among those that will stay closed for now). However, the measures, which will be staggered across the city, will ban private car traffic where they are in place.