The most important trades in markets are now all about inflation.
Stocks slid on Wednesday and oil rose as investor skepticism over Russia’s promise to de-escalate the war brought back the spectre of higher raw material prices and commodity disruption.
The moves reverse some of the rally from yesterday, when markets broadly jumped higher and the S&P 500 closed at the highest since mid-January. An end to the war is expected to see commodity prices decline, removing some of the pressures on central banks and energy-importing nations.
It all underscores how investing is being filtered through an inflation-driven prism rather than by a peace dividend, according to strategists.
“Any hint of an end to the conflict would ease commodity prices and bring inflation down,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “That’s why people are watching the yield curve, and this could all point to rate cuts coming sooner rather than later as people recognize that there are inflation risks, but they may be now further down the line.”
Traders have been unwinding some of their biggest bets on elevated commodity prices -- though many are cautious over Russia’s offer to scale back military operations -- and returning to assets that have been sold off, from European stocks to emerging markets and even the yen.
Japan’s currency, which slumped to its lowest since 2015 this month, is a case in point of how inflation-driven trades are trumping traditional risk-on plays. The currency strengthened as much as 1.3% against the dollar on Wednesday as traders focused on how lower energy prices will help the nation’s trade balance, rather than being attracted by its haven quality.
“The falling crude oil prices amid the Russia-Ukraine talks might ease concern over Japan’s trade deficit due to the larger energy imports bills,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. The yen was also due for a rebound after recent weakness, he said.
Treasuries are extending a rally, with the benchmark 10-year yield dropping as much as six basis points after declining by the same amount on Tuesday. Bonds from Australia to Japan also gained. The MSCI Asia Pacific Index climbed as much as 0.9%.