Stocks rallied this morning ahead of the Fed’s first rate hike of 2022, which is set to be announced in a little over an hour. Hopes of peace encouraged bulls at the open today following allegations of “significant progress” in negotiations between Ukraine and Russia.
The Financial Times reported that, according to three anonymous sources, negotiators are in the process of hashing out a 15-point “peace plan.” The plan involves a ceasefire and full Russian military withdrawal on the condition that western Ukraine declares NATO neutrality while accepting a limit on the size of its armed forces.
In addition, Ukraine would need to promise to not host foreign military bases or weapons in exchange for protection from the West (US, EU, Turkey).
As the Financial Times disclosed, though, these were anonymous – i.e., less credible – sources providing this information. Investors have been told several times over the last few weeks that Ukraine and Russia were close to reaching a peace deal.
Ultimately, talks fell through each time. And it seems as though it could happen again based on recent remarks from Ukrainian officials.
“We will never allow Ukraine to become a stronghold of aggressive actions against our country,” they said before adding that they’re skeptical about Putin’s commitment to striking a deal.
UK defense minister Ben Wallace perhaps put it best:
“There is a massive information campaign going on in this conflict, this war, and certainly when it comes to Russia you need to judge them on their actions and not on their numerous words,” Wallace explained.
Both sides of the conflict began distributing propaganda on social media as soon as the conflict started. Ukraine President Zelensky went so far as to thank Meta’s Mark Zuckerberg directly for allowing violent threats from Ukrainian users against Russians on Facebook and Instagram.
But in general, the “war of words” – both on social media and at the negotiating table – has yet to produce anything of substance for Ukrainian forces. Russia’s slow grind through western Ukraine continues, and until Zelensky capitulates, the war will persist.
“The market is hoping for resolution in Ukraine, but of course, it’s just talks at this point, and we actually need to see a ceasefire, we need to see that play out in more entirety before we close the loop on that so there’s still a lot of uncertainty,” said Homrich Berg chief investment officer Stephanie Lang.
Today’s biggest news, however, will undoubtedly prove to be the Fed’s rate hike. The market expects a 25 basis point (bps) rate increase this afternoon. If Fed Chairman Jerome Powell hikes more than 25 bps, stocks are unlikely to react positively. St. Louis Fed President Jim Bullard suggested that the Fed would need to hike rates by 50 bps in an interview last month.
This caused stocks to temporarily spike lower before other FOMC members came out and called his comments “irresponsible.”
Bullard’s probably right, though, in that the Fed needs to hike rates more aggressively if it’s going to seriously fight inflation. On the other hand, if Powell believes a recession is on its way (it probably is), he may go with a weaker hike, hoping that the coming recession brings down inflation on its own.
Either way you slice it, the situation looks pretty grim for bulls in the long term. Short-term, a rally could absolutely materialize if Powell barely nudges rates higher. But that doesn’t mean the bullish enthusiasm would continue for the rest of the year, especially once the US economy shows additional signs of an impending slowdown.
