North American stocks rebounded on Wednesday and crude prices surged past $110 a barrel as fighting raged in Ukraine for a seventh day, posing a challenge for central banks hoping to curb rising inflation.
Canada’s commodity-heavy main stock index rose, as soaring oil prices drove energy shares higher, while the Bank of Canada raised its key overnight interest rate for the first time in more than three years to curb soaring inflation.
The Toronto Stock Exchange’s S&P/TSX composite index was unofficially up 251.13 points, or 1.2%, at 21,255.64.
The energy sector climbed 0.9% with oil surging relentlessly, extending its rally since Russia invaded Ukraine seven days ago, on expectations that the market will remain short of supply for months to come following sanctions on Moscow and a flood of divestment from Russian oil assets by major companies.
The market rallied into the close of trading on heavy volume, with global benchmark Brent crude ending the day at its highest close since June 2014, while U.S. crude’s settlement was its highest since May 2011.
The oil rally has been dramatic, with Brent gaining over 15% this week alone as the West responded to Moscow’s invasion with numerous sanctions, which have targeted financial transactions and banks, designed to hammer Russia’s economy.
While the energy sector was not specifically targeted, the sanctions have hampered exporting capabilities from Russia, whose oil exports account for about 8% of global supply, or 4 million to 5 million barrels per day, more than any nation other than Saudi Arabia.
“It increasingly looks like the market is pricing in a supply disruption to at least part of the nearly 4 million barrels per day of oil that is sold into the U.S. and EU,” said Andrew Lipow, president of Lipow Oil Associates in Houston.
Brent crude futures peaked at $113.94 a barrel during the session, before settling at $112.93, up $7.96, or 7.6%.
U.S. West Texas Intermediate (WTI) crude futures hit a high of $112.51 a barrel, and closed $7.19, or 7%, higher at $110.60.
The Bank of Canada raised interest rates by 25 basis points to 0.50%, and said rates would need to go higher despite increased uncertainty following Russia’s invasion of Ukraine.
The central bank also warned that Russia’s invasion of Ukraine “is a major new source of uncertainty,” noting commodity prices had risen sharply and would fuel further inflation, while new supply disruptions could weigh on global growth.
“It was a widely expected rate hike by Bank of Canada. I think they had done a good job of priming the market for a rate hike to start in March,” said Philip Petursson, chief investment strategist at IG Wealth Management.
“I think they would have gone 50 bps, but for the very recent tensions between the Ukraine and Russia and its impact on the global financial markets, I think they paused on 50, held firm on 25.”
Canada’s inflation rate hit 5.1% in January, its highest level since September 1991 and its 10th consecutive month above the Bank of Canada’s 1%-to-3% control range.
Heavily weighted financials, which benefit from higher rates gained 1.5%.
The technology sector fell 0.1%, as higher interest rate environment makes future income flows from tech and other high-growth sectors less valuable to investors.
Wall Street ended sharply higher on Wednesday after Federal Reserve Chair Jerome Powell signaled the central bank would likely raise interest rates less than some investors had feared.
Powell’s comments, in testimony to the U.S. House of Representatives Financial Services Committee, helped calm investors after Russia’s invasion of Ukraine sent markets into a tailspin.
Powell said he is inclined to support a 25 basis point rate hike in March, quelling some concerns about the potential for a more aggressive rate hike.
Traders now see a 95% probability of a 25 basis point hike in March.
All the 11 S&P 500 sector indexes advanced, with financials jumping 2.6% after falling sharply so far this week. The banks index rebounded 3% after hitting its lowest level since September 2021 in the previous session.
Energy shares resumed their march higher, with the S&P 500 energy index rallying 2.2% as Brent crude jumped to near eight-year highs after Western sanctions disrupted transport of commodities exported by Russia.
Russia’s week-old invasion has yet to achieve its aim of overthrowing Ukraine’s government. Ukrainians said they were battling on in the port of Kherson, the first sizeable city Russia claimed to have seized, while air strikes and bombardment caused further devastation in other cities.
“From day to day you go from the fear of escalation that could make things very bad to the hope that it will not really happen and that cooler heads will prevail, and that the economy is strong enough to get through this,” said Tom Martin, senior portfolio manager at GLOBALT Investments in Atlanta.
Apple ended 2.1% higher after announcing a product launch for March 8, when it is expected to promote a low-cost version of its popular iPhone with 5G.
The Dow Jones Industrial Average rose 1.79% to end at 33,891.35 points, while the S&P 500 gained 1.86% to 4,386.54.
The Nasdaq Composite climbed 1.62% to 13,752.02.
Reflecting the breadth of Wednesday’s rally, the S&P 500 value index climbed 1.9% and the growth index added 1.7%.
The Philadelphia Semiconductor Index jumped 3.4%, lifted by an 8.2% jump in Micron Technology.
Volume on U.S. exchanges was 13.1 billion shares, compared with a 12.4 billion average for the full session over the last 20 trading days.
Data showed U.S. private employers hired more workers than expected in February as the labor market recovery gathered steam.
Nordstrom Inc surged 38% after the department store chain forecast upbeat full-year revenue and profit.
Markets are struggling with what happens to growth in Europe and the U.S. because of the Ukraine conflict, said Marvin Loh, global macro strategist at State Street.
“This increase in energy prices makes it a challenge for the Fed because on the one end, it increases inflation,” Loh said.
“But, generally speaking, when you get these surges in energy prices there’s a deflationary component associated with that, because it saps growth elsewhere,” he said.
After a week at war, Russia has yet to achieve its aim of overthrowing Ukraine’s government. Ukrainians said a battle ensued in the port of Kherson, the first sizeable city Moscow claimed to have seized.
The major European indices finished the day in a sea of green too, with commodity-linked stocks making big gains.
The pan-European STOXX 600 index closed up 0.90%, rebounding from an earlier decline, and MSCI’s gauge of stocks across the globe gained 0.92%.
Euro zone bond yields rose after dramatic declines a day earlier, with Germany’s real yield hitting a record low as traders assessed the economic fallout of the Ukrainian invasion.
Repricing saw Germany’s 10-year yield, the benchmark for the euro zone, recorded its biggest daily fall since 2011 on Tuesday. Markets unwound part of those moves, Germany’s 10-year yield up 8.1 basis points to 0.009%. The yield on 10-year Treasury notes was up 12.6 basis points to 1.837%.
Euro zone inflation soared to another record high last month, intensifying a policy dilemma for the European Central Bank, which needs to convey a sense of calm amid war-related market turmoil and also respond to mounting price pressures.
Aluminum prices bolted to a fresh record peak as investors fretted that logistics difficulties would block metals supplies due to tough sanctions on major producer Russia.
Three-month aluminum on the London Metal Exchange surged to a record of $3,580 a ton.
The Russian ruble strengthened 7.63% at 103.10 per dollar.
Foreign investors are effectively stuck with their holdings of ruble-denominated bonds after the Russian central bank put a temporary halt on coupon payments and a major overseas’ settlement system stopped accepting Russian assets.
JP Morgan analysts said in a note the sanctions on Russia have “significantly increased the likelihood of a Russia government hard currency bond default.”
The dollar index rose 0.228%, with the euro down 0.24% to $1.1099.
The Japanese yen weakened 0.60% at 115.58 per dollar.
Reuters
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