Stock futures fall as Wall Street weighs Russia-Ukraine tensions, potential Fed rate hikes

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, January 18, 2022.

Brendan McDermid | Reuters

Stock futures were lower early Monday morning as investors continued to monitor the developing tensions between Ukraine and Russia and potential Federal Reserve rate hikes.

Futures tied to the Dow Jones Industrial Average fell 242 points, or 0.7%. S&P 500 futures dropped 0.8% and Nasdaq 100 futures slid about 1%.

“The real fear is that China backs Russia and the relationship between China and the U.S. continues to deteriorate,” said Robert Cantwell, chief investment officer at Upholdings. “How it changes the U.S. relationships with the other economic superpowers – that’s what’s really scary and would affect economic outcome.”

A phone call over the weekend between U.S. President Joe Biden and Russian President Vladimir Putin, in which Biden attempted to dissuade Putin from attacking Ukraine, failed to achieve a breakthrough

Some airlines have also halted or redirected flights to Ukraine amid the brewing crisis, while the Pentagon ordered the departure of U.S. troops in Ukraine.

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Traders are also weighing the potential impact of surging inflation on the U.S. economy, as well as the potential measures the Federal Reserve could take to quell the jump in prices.

The moves follow a rocky week for stocks, which were pressured by a hot inflation report and fears of a Russian attack on Ukraine. The Dow and S&P 500 fell 1% and 1.8%, respectively, for the week. The tech-heavy Nasdaq Composite slid more than 2%.

On Friday, the Dow tumbled 503.53 points, or 1.43%. The S&P 500 dropped 1.9% and the Nasdaq Composite shed 2.8%. The declines came as the White House warned that a war in Ukraine could begin “any day now” and urged Americans there to leave “immediately.” Oil prices jumped Friday, along with traditional safe havens like Treasurys.

The Labor Department reported Thursday that inflation in January surged 7.5%, its biggest 12-month gain since 1982. Rate-sensitive tech stocks were hit hard by the report, which briefly sent the 10-year Treasury yield above 2% — the first time since 2019 that the 10-year traded above that level.

After the report’s release, St. Louis Fed President James Bullard said that he was open to a 50-basis point rate hike next month, adding that he wanted to see a full percentage point of hikes by July. To be sure, San Francisco Fed President Mary Daly said Sunday that the central bank should take a “measured” approach when raising rates.

However, futures trading was still tilting toward a hawkish central bank, with markets pricing in about a 55% chance of seven rate hikes this year, according to the CME.

Bonds were mixed Monday morning, with yields slipping on the far end of the curve. The benchmark 10-year Treasury note most recently yielded 1.92% though the 2-year, which is most sensitive to Fed moves, rose to 1.53%.

The tension over Ukraine also continued to hit the energy markets, with natural gas futures up nearly 5% early Monday while oil prices also edged higher.

“This past week, the primary story was all about inflation,” Cantwell said. “Every single time the inflation number comes out, it keeps surpassing expectations and the while the Fed has signaled that it’s going to raise rates, they haven’t actually raised them. The longer they wait, the faster they’re going to have to raise them.”

Economists at Goldman Sachs also raised their Fed forecast to seven hikes for 2022, and said it sees the 10-year hitting 2.25% this year.

The firm also lowered its 2022 S&P 500 price target to 4,900 from 5,100. That would represent just a 2.8% return from where the benchmark ended 2021. Goldman said that higher rates will crimp valuations.

Earnings are expected to ramp up again this week, with Nvidia, Walmart, Shopify, AMC and more scheduled to report.

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