NEW YORK, March 30 ― Stock markets tore higher across the world yesterday and oil prices shed US$2 (RM8.42) a barrel, as investors celebrated signs of progress in negotiations between Russia and Ukraine that they hoped would lead to a settlement in a five-week conflict.

Even though the US government warned that Russia's latest move was a sign it is redeploying, not withdrawing, troops, investors nonetheless piled into risky assets, ignoring surging inflation and imminent rate hikes that could mar the growth outlook and upend stock market buoyancy.

In a sign that the exuberant stock market may run into headwinds, a closely-watched section of the US yield curve briefly inverted for the first time since September 2019, signalling a possible recession ahead.

Indeed, some analysts warned that the latest bout of optimism may be misplaced.

“Over the last two weeks, the S&P has produced one of its sharpest rallies in history, larger than the biggest 10-day rallies in seven of the S&P's 11 bear markets since 1927,” said analysts at Bank of America Global Equity Derivatives Research.

“It has done so despite clearly weaker fundamentals (more hikes, higher inflation, and curve inversion) and the Fed leaning against equity market strength to hike faster,” they wrote, adding that they think sustained gains in US stocks are unlikely.

US stock indices jumped over 1 per cent, Europe's main bourses enjoyed 1 per cent to 2.5 per cent gains, and oil tumbled close to US$5 at one point as Russia's deputy defence minister emerged saying Moscow has decided to drastically cut military activity around Ukraine's capital Kyiv and also Chernihiv.

With yesterday's rally, Wall Street ― aided by data that showed a rebound in US consumer confidence in March ― notched its fourth straight day of gains. Asia was lifted overnight too after the Bank of Japan defended its vast stimulus programme, although the yen's worst month since 2016 was still raising eyebrows.

Dealers also shrugged off bigger-than-expected drops in French and German consumer confidence data and signs that Russia will push ahead with plans to start billing for its gas in roubles, and is prepared to risk a historic sovereign debt default.

Germany's benchmark 10-year Bund yield ― the main gauge of European borrowing costs ― hit its highest since early 2018 and 2-year yields turned positive for the first time since 2014, adding to the seismic shifts in global rates markets this year as inflation has surged.

US Treasury yields paused their ascent yesterday, but have risen an eyewatering 165 basis points this quarter.

Benchmark 10-year US Treasuries retreated to 2.391 per cent while the equivalent 2-year yields were at 2.367 per cent. More than 200 basis points of US interest rate rises are also now priced in for 2022 which, if realised, would be the most in a calendar year since 1994.

The difference between 2- and 10-year Treasury yields, which is tracked as a harbinger of recession, briefly fell as low as minus 0.03 of a basis point yesterday, as traders bet that aggressive tightening by the Federal Reserve could hurt the economy over the long term.

This so-called curve inversion is considered a reliable predictor of recession, although some analysts say the curve has been distorted by quantitative easing and investors should not read too much into it. The Fed has also urged investors to watch other curve segments which are still steep, giving it room to tighten policy further and faster.

“We have seen something that is a little unprecedented because the Fed is suddenly facing a question about its credibility and whether it can effectively reduce inflation,” said Amundi's head of multi-asset strategies, Francesco Sandrini.

He added that Amundi had revised its European growth forecast downward to 1.5 per cent for the year from 2 per cent previously, but it could be lower if the situation continues to deteriorate.

“We question a lot our forecasts,” Sandrini said, especially as Europe's big companies are more heavily exposed to commodity price pressures than US counterparts. “It is extremely complicated, we need to proceed cautiously.”

Battered yen

The Dow Jones Industrial Average jumped 0.97 per cent, the S&P 500 leapt 1.23 per cent, and the Nasdaq Composite climbed 1.8 per cent. MSCI's gauge of stocks across the globe gained 1.54 per cent.

All the three of the main S&P 500, Dow Jones and Nasdaq indexes are on course to end March higher. However, they are also set to record their worst start to a year and indeed any quarter since the start of 2020 when the outbreak of the coronavirus pandemic wreaked havoc on financial markets.

In the currency market, the yen continued to languish at 122.88 per dollar even after staging a small recovery from its bruising the day before, when the Bank of Japan vowed to buy unlimited amounts of 10-year government bonds to prevent its bond yields from rising too much further.

The central bank was finding it tough going, however. The 10-year JGB yield stood at 0.245 per cent, right up against the BoJ's implicit 0.25 per cent cap.

Among commodities, oil prices clawed back some of the day's losses, which were incurred after Russia's top negotiator in the talks with Ukraine described the discussions as “constructive”. Brent crude settled down US$2.25, or 2 per cent, at US$110.23 a barrel, while US crude fell US$1.72, or 1.6 per cent, to $104.24.

Prices had weakened earlier too as China's financial hub Shanghai tightened its latest Covid-19 lockdown, after it reported a record 4,381 asymptomatic cases and 96 symptomatic cases for March 28 ― though the caseload remains modest by global standards.

Spot gold dropped 0.2 per cent to US$1,919.14 an ounce. ― Reuters