• Equities look to be making a comeback as Russia-Ukraine talks eyed and oil surge eases
• Dollar softer despite elevated yields, pound steadier after skidding on Bailey’s remarks
• BoJ keeps buying JGBs but yen selloff takes a breather as officials get edgy about weakness

Equity markets were in a bullish mood on Tuesday after the S&P 500 notched up its third straight session of gains yesterday, recouping more than 60% of its year-to-date losses. Heavyweights like Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) and other big tech names led the gainers, along with airline stocks. But while the latter were buoyed by the pullback in oil prices, there was no clear driver behind the price rally for some other stocks.

The cautious optimism that the latest round of talks between Ukrainian and Russian negotiators might actually produce a ceasefire is generally aiding broader sentiment today. The two sides are meeting in Turkey later today and there seems to be some convergence of positions. Moscow has changed its tone on allowing Ukraine to join the European Union as long as Kyiv drops its NATO membership bid, while Ukrainian President Volodymyr Zelensky is open to discuss a neutral status for his country.

However, Washington is wary about President Vladimir Putin’s willingness to compromise and major breakthroughs are probably not on the cards just yet.

Nevertheless, risk assets are powering ahead today as the worst of the crisis seems to have been already fully priced in. From the markets’ perspective, NATO’s red line on direct military involvement in the war and the indications that Western leaders are saving any remaining punitive sanctions as a last resort is enough to suggest that tensions won’t boil more than they already have.

European shares followed Wall Street, opening today’s session with gains of at least 1%. London’s FTSE 100 lagged slightly as lower oil prices weighed on the energy sector and in Asia, Chinese stocks bucked the trend to close lower.

Higher yields not spooking markets

The danger, though, for investors going forward is that this could still turn out to be a very prolonged war, meaning cost-push inflation is unlikely to go away quickly. Even on that front, the optimists are going with the thinking that most of the Fed rate hikes have already been baked into the markets by now. However, there remains a huge amount of uncertainty about what the Fed’s terminal rate will be in this cycle and this could be something that could come back to haunt the markets at some point in the not-too-distant future.

For now, stocks are proving to be incredibly resilient to the spike in Treasury yields, even as the 10-year yield hovers around 2.50%.

Yen stabilizes amid FX intervention speculation

The elevated yields are supporting the US dollar, which has come under slight pressure from the improved risk tone. The dollar index is mainly being weighed down by a firmer euro and yen.

The Japanese currency is paring some of yesterday’s heavy losses despite more intervention by the Bank of Japan today in the bond market. The BoJ is stepping up its purchases of Japanese government bonds (JGB) to defend its upper 10-year yield cap of 0.25%. But while this reflects no policy change at the BoJ, Japan’s finance ministry is keeping a close eye on the yen’s depreciation.

Markets suspect the government is getting ready to prop up the yen should it fall any further against the dollar after a Japanese currency official told reporters he had discussed FX stability issues with his US counterpart.

Bailey delivers another punch to the pound

But while the yen managed to find its feet a little, steading to around 123.60 yen per dollar from Monday’s 6½-year trough of 125.10, the pound was struggling again on Tuesday.

Bank of England Governor Andrew Bailey reiterated his message yesterday from the March policy meeting, warning about the downside risks to inflation from weaker growth. Bailey acknowledged that “we are beginning to see evidence of growth slowdown”, marking another policy shift for the Bank of England, which now appears to be more closely aligned with the ECB than the Fed.

The pound hit a two-week low of $1.3048 earlier in the session before steadying to around $1.3085.
Fed speakers are likely to come under investors’ radar later in the day, including New York Fed President John Williams at 13:00 GMT along with the latest US consumer confidence reading at 14:00 GMT.