European stocks rallied, the euro strengthened and US equity futures gained after Russia said it would reduce its military operations near Ukraine’s capital Kyiv.
The regional Stoxx 600 share index added 2.1 per cent, with outsized gains for carmakers caused by hopes that a cessation of hostilities would ease supply chain disruptions. The index is trading at its highest level since February 18, before Russia launched a full-scale invasion of Ukraine.
The Stoxx sub-index of European bank shares rose 5.2 per cent, boosted by a rosier outlook for a eurozone economy that is highly dependent on energy supplies from Russia, wiping out all of its losses for March so far.
“Investors can’t know much about wars other than they end at some point, and headlines that seem to bring that day forward are obviously very good for market psychology,” said Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.
Futures markets implied more muted gains on Wall Street, which was considered to be less vulnerable than European markets to the Ukraine war. Contracts tracking the S&P 500 rose 0.9 per cent and those following the tech-focused Nasdaq 100 rose 1.1 per cent.
After envoys from Moscow and Kyiv met in Istanbul on Tuesday to discuss a possible peace deal, Russia said it had decided to “dramatically” scale back military activities in the Kyiv and Chernihiv areas.
The euro rose almost 1 per cent against the dollar to $1.109 while the greenback fell 4 per cent against Russia’s rouble.
Germany’s two-year bond yield briefly rose above zero for the first time since 2014 as the price of the debt security fell, reflecting bets of a peace deal boosting the European Central Bank’s resolve to tighten monetary policy.
Brent crude oil fell 5.7 per cent to $106 a barrel, having risen close to $140 in early March. West Texas Intermediate fell by a similar margin to $99.84.
Many investors fear a moderation in the Ukraine conflict will provide only a short-term boost to equity markets, as central bank rate rises increase companies’ costs of doing business.
Guilhem Savry, cross-asset manager at Unigestion, said that while short-term, trend-following hedge fund strategies were at present buying equities, “this could reverse quickly as [economic] fundamentals are not supportive”.
He added: “We are in a short-term positive cycle that will change once there is a negative geopolitical event or negative economic growth data.”
Shorter dated US Treasuries remained under pressure as traders bet on the Federal Reserve raising interest rates rapidly this year to battle surging inflation. The Treasury yield curve, which charts income yields on bonds of different maturities and traditionally slopes upwards, flattened on concerns central banks’ near-term measures to tamp down inflation would also dent future economic growth prospects.
The yield on the two-year Treasury note, which moves inversely to its price and tracks monetary policy expectations, added 0.01 percentage points to 2.4 per cent. The benchmark 10-year yield was flat at 2.48 per cent.
In Asia, Hong Kong’s Hang Seng index rose 1.1 per cent and Japan’s Topix gained 0.9 per cent.
