Oil falls around $5 a barrel on Russia-Ukraine talk hopes, COVID-19 surge in China

Oil prices fell by around $5 a barrel on Monday as investors pinned hopes on diplomatic efforts by Ukraine and Russia to end their conflict, while a surge in COVID-19 cases in China spooked the markets.

Brent was down by $4.62, or 4.1 per cent, at $108.05 a barrel at 1152 GMT, and U.S. West Texas Intermediate (WTI) crude fell $5.45, or 5 per cent, to $103.88 a barrel.

Both contracts have surged since Russia’s Feb. 24 invasion of Ukraine and are up roughly 40 per cent for the year to date.

Ukrainian and Russian negotiators are set to talk again on Monday via video link. Negotiators had given their most upbeat assessments after weekend negotiations, suggesting there could be positive results within days.

“Beside new talks between Ukraine and Russia, I guess new lockdowns in China are the reason for a negative start of the week for crude oil,” said UBS analyst Giovanni Staunovo.

China, the world’s largest crude oil importer and second largest consumer after the United States, is seeing a surge in COVID-19 cases, as the highly transmissible Omicron variant spreads to more cities, triggering outbreaks from Shanghai to Shenzhen.

Its daily new case load figures have hit two-year highs, with 1,437 new confirmed coronavirus cases reported on March 13.

“This week, market participants are closely tracking how Russian oil exports are evolving. So far this month oil flows had not been disrupted,” Staunovo added.

Russia’s output of oil and gas condensate rose to 11.12 million barrels per day (bpd) so far in March, two sources familiar with oil production data told Reuters, despite sanctions on Russian oil.

India is also considering taking up a Russian offer to buy its crude oil and other commodities at discounted prices with payment via a rupee-rouble transaction, two Indian officials said.

The United States has announced a ban on Russian oil imports and Britain said it would phase them out by the end of the year. Russia is the world’s top exporter of crude and oil products combined, shipping around 7 million bpd or 7 per cent of global supplies.

British Prime Minister Boris Johnson is trying to persuade Saudi Arabia to increase its oil output, a senior minister said, following reports that Johnson would travel to the OPEC heavyweight this week.

International Energy Agency (IEA) chief Fatih Birol on Monday urged oil-producing countries to pump more to stabilize markets.

“Oil prices might continue moderating this week as investors have been digesting the impact of sanctions on Russia, along with parties showing signs of negotiation towards (a) ceasefire,” said Tina Teng, an analyst at CMC Markets.

Oil prices also came under pressure after India said it will take “appropriate” steps to calm the rise in oil prices, indicating the country could release more oil from its national stocks if required.

Investors are also closely watching the U.S. Federal Reserve meeting this week. The Fed is expected to start raising interest rates, which would boost the dollar and put downward pressure on oil prices.

Oil prices typically move inversely to the U.S. dollar, with a stronger greenback making commodities more expensive for holders of foreign currencies.

As Russia nears a debt default, talk now turns to global contagion

Russia is on the brink of defaulting on its debt, according to ratings agencies and international bodies, but economists do not yet see a global contagion effect on the horizon.

International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.”

Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments.

Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.”

However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC.

The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.

Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.”

S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-” on the basis that the measures taken by Moscow to mitigate the unprecedented barrage of sanctions imposed by the U.S. and allies “will likely substantially increase the risk of default.”WATCH NOWVIDEO03:41Moody’s downgrades Russia’s credit rating in an ‘unprecedented’ way

“Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including ones targeting the foreign exchange reserves of The Central Bank of Russia (CBR); this has rendered a large part of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and impairing what had been – until recently – Russia’s standout credit strength: its net external liquidity position,” S&P said.

Moody’s also slashed Russia’s credit rating earlier this month to its second-lowest tier, citing the same central bank capital controls likely to hinder payments in foreign currencies, resulting in defaults.

Moscow moved to strengthen its financial position following a suite of western sanctions imposed in 2014, in response to its annexation of Crimea. The government ran consistent budget surpluses and sought to scale back both its debts and its reliance on the U.S. dollar.WATCH NOWVIDEO02:10Scholar discusses China’s position on U.S. and EU sanctions on Russia

The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but reserves of dollars and euros have been effectively frozen by recent sanctions. Meanwhile, the Russian ruble has plunged to all-time lows.

“To mitigate the resulting high exchange rate and financial market volatility, and to preserve remaining foreign currency buffers, Russia’s authorities have – among other steps – introduced capital-control measures that we understand could constrain nonresident government bondholders from receiving interest and principal payments on time,” S&P added.

Grace periods

Russian Finance Minister Anton Siluanov said Monday that Russia will use its reserves of Chinese yuan to pay Wednesday’s coupon on a sovereign eurobond issue in foreign currency.

Alternatively, Siluanov suggested the payment could be made in rubles if the payment request is rebuffed by western banks, a move Moscow would view as fulfilling its foreign debt obligations.

Although any defaults on upcoming payments would be symbolic – since Russia has not defaulted since 1998 – Deutsche Bank economists noted that nonpayments will likely begin a 30-day grace period granted to issuers before defaults are officially triggered.WATCH NOWVIDEO05:53We could be heading for World War III if Russia joins forces with China, investor says

“Thirty days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside,” Jim Reid, Deutsche Bank’s global head of credit strategy, said in an email Monday.

“There has already been a huge mark to market loss anyway with news coming through or write downs. However, this is clearly an important story to watch.”

Russian assets pricing in defaults

Trading in Russian debt has largely shut down since the web of sanctions on central banks and financial institutions was imposed, with government restrictions and actions taken by investors and clearing exchanges freezing most positions.

Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, said in a recent note that investors will be unable to access any liquidity in Russian assets for some time. Bhatia added that prices for Russian government securities are now pricing in a default scenario, which Neuberger Berman strategists think is a likely outcome.

“It’s unclear why Russia would want to use hard currency to repay these securities at the moment, and we expect much of this debt to enter ‘grace periods’ over the coming month,” he said.WATCH NOWVIDEO04:38Russia’s economy will limp on without much deeper dislocation, strategist says

“Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and will likely remain there.”

Bhatia suggested that the key macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure to global credit markets will be “relatively muted” with recent volatility across asset classes continuing.

“But given that Russian securities have been repriced to default levels, we believe those immediate impacts are largely over,” he said.

China’s ‘Silicon Valley’ manufacturing hub orders production halts to control a Covid spike

China’s ‘Silicon Valley’ manufacturing hub orders production halts to control a Covid spike

PUBLISHED MON, MAR 14 202212:31 AM EDT

BEIJING — Mainland China is facing its worst Covid-19 outbreak since the country clamped down on the pandemic in 2020, with major cities rushing to limit business activity.

Shenzhen, the biggest city in the manufacturing hub of Guangdong province, told all businesses not involved with essential public services to suspend production or have employees work from home for a week starting Monday. The production halts reportedly include Apple supplier Foxconn, which did not immediately respond to a CNBC request for comment.

The city, sometimes called China’s “Silicon Valley,” has shut public transportation and begun a third city-wide round of testing. Shenzhen has reported more than 400 confirmed cases since late February.

Those numbers and case counts across China pale in comparison with other countries. But the rapid increase in cases in the last few days has local authorities rushing to control the outbreak as China seeks to maintain its zero-Covid strategy.

Shanghai, the coastal metropolis home to many foreign businesses and financial firms in China, has reverted schools to online classes. Some neighborhoods have entered lockdown and conducted mass testing, and residents typically cannot leave until results come back negative.

The city on Saturday told residents not to leave Shanghai unless absolutely necessary. More than 600 confirmed cases have been found since late February.WATCH NOWVIDEO03:08Two years into the pandemic, will we need a fourth shot?

Jilin province in northern China reported an overnight surge this past weekend of over 1,000 new locally transmitted coronavirus cases, for a total of more than 2,900 cases this month as of Sunday.

In all, mainland China reported 1,437 new confirmed cases as of Sunday — with only 100 attributed to travelers from overseas — for a total of 8,531 domestically transmitted active cases. That’s the most since March 2020. No new deaths have been reported.

Hong Kong, a special administrative region just across the border from Shenzhen, has fought a resurgence of Covid cases in the last few weeks. The region has the highest number globally of new Covid-related deaths per million people, according to Our World in Data.

Hong Kong’s outbreak stems from the highly transmissible omicron variant, which has since spread to the mainland.

Beijing city on alert

The capital city of Beijing said Sunday it identified six sources of transmission for the latest handful of municipal cases, mostly reported around the downtown and eastern parts of the city. Local authorities said anyone returning to Beijing must not attend gatherings for seven days following arrival.

For months the capital has had one of the strictest Covid control policies in the country. Travelers must show a negative Covid test taken 48 hours before entering Beijing, and take another test within 72 hours of arrival. If their 14-day travel history shows they visited a locale with a confirmed case, they are not allowed into the city.

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After the emergence of Covid-19 in Wuhan in late 2019, mainland China shut down more than half the country in February 2020 to control the outbreak. Domestically, the virus came under control within weeks, but Covid had spread overseas in a global pandemic.

As of Monday, South Korea followed by Germany have the highest 28-day new case counts at 5.2 million and 4.8 million, respectively, according to Johns Hopkins data. The U.S. has recorded the most deaths, at more than 967,000 as of Monday morning Beijing time.

Zero-Covid isn’t going away

Mainland China has maintained a strict “zero-Covid” policy for the last two years. The travel restrictions and potential for swift lockdowns have weighed on domestic tourism and services businesses, dragging down consumer spending.

An annual parliamentary meeting that wrapped up Friday gave no signs that the central government plans to loosen its Covid control policy, although official statements in recent months have added terms such as “dynamic.”

Vice Premier Sun Chunlan said at a government meeting for epidemic control Saturday that the country should keep following the “dynamic” zero-Covid policy and that all measures should be taken to prevent a large-scale virus resurgence.

Her remarks, as published by state media, ended with a call to prepare the way for a top meeting of the ruling Chinese Communist Party later this year. Chinese President Xi Jinping is expected to receive an unprecedented third term at the meeting.

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Abandoning zero-Covid “now could be perceived as conceding that the strategy did not work in the first place,” Nomura’s chief China economist Ting Lu said in a note Friday.

“The next 12 months are a crucial time for the one-in-a-decade leadership change, which is pushing top leaders to stick to the status quo in order to avoid making policy mistakes,” he said. “Pictures of many Hong Kong Covid patients treated outside overwhelmed hospitals have further convinced Chinese officials and the masses that ZCS is China’s only viable solution to the coronavirus.”

China’s Center for Disease Control and Prevention published a study in November that said shifting to the coexistence strategy of other countries would likely result in hundreds of thousands of new daily cases and devastate the national medical system.

But, Lu said, the economic costs of the zero-Covid strategy are rising, while the benefits are diminishing.

“Amid rounds of lockdowns and travel bans across China,” he said, “more individuals are feeling the pinch, becoming worn out, unemployed or underemployed, and have drained their savings to a level at which they have to reduce spending.”

Investors will continue to monitor developments around the Russia-Ukraine war and Covid wave in China, both of which threaten to further disrupt global supply chains.

SINGAPORE — Shares in Asia-Pacific were mixed in Monday morning trade as investors monitor a Covid wave in China. Meanwhile, oil prices continued to be volatile amid the Russia-Ukraine war.

Hong Kong’s Hang Seng index dropped 2.77% in morning trade as shares of Chinese tech heavyweight Tencent fell 3.43%. Mainland Chinese stocks were also lower, with the Shanghai composite down 1.5% while the Shenzhen component shed 1.46%.

In Japan, the Nikkei 225 climbed 1.03% while the Topix index advanced 0.97%. The S&P/ASX 200 in Australia gained 1.07%.

South Korea’s Kospi lagged, dipping 0.54%.

MSCI’s broadest index of Asia-Pacific shares outside Japan traded 0.99% lower.

Investors continued watching developments on the Russia-Ukraine war, which is disrupting shipping and air freight. Elsewhere, markets also monitored a recent wave of Covid infections in China — including the major city of Shenzhen.

Oil prices fall 3%

Oil prices fell in the morning of Asia trading hours, with international benchmark Brent crude futures down 3.03% to $109.26 per barrel. U.S. crude futures shed 3.16% to $105.87 per barrel.

Oil prices during the Russia-Ukraine conflict have spiked to record levels but fell back in the past week on supply hopes, before rising again to close out the week. Over in Asia, China, India, Japan and South Korea are all major importers of oil, according to 2020 data from the International Energy Agency.

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The U.S. Federal Reserve is widely expected to announce a rate hike later this week, the first such move since 2018.

In Asia, the Bank of Japan is also set to announce its monetary policy decision later in the week.

Currencies

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 99.049 after its recent bounce from below 98.

The Japanese yen traded at 117.66 per dollar after last week’s weakening from below 116 against the greenback. The Australian dollar was at $0.7275 after slipping from above $0.732 late last week.

Investors jump into commodities while keeping eye on recession risk

Investors are rushing to recalibrate their portfolios for a potentially extended period of elevated commodity prices, as Russia’s invasion of Ukraine sparks eye-popping moves in raw materials that threaten to exacerbate inflation and hurt growth.

Wild moves have been the norm in commodities over the last few weeks, as the war in Ukraine and subsequent sanctions on Russia helped lift oil prices to 14-year highs and natural gas prices near records. Prices for wheat and copper stand near all-time highs, while a doubling of the price of nickel earlier this week forced the London Metals Exchange to halt trading in the metal.

With the U.S. economy already feeling the stress of a broad, post-COVID-19 boost in demand and a quick resolution to the West’s standoff with Russia in doubt, some investors are betting high commodity prices are likely to remain for the foreseeable future.

Investors have sent $10.5 billion into commodities-focused ETFs and mutual funds since the start of the year, including a $2.8 billion gain in the week that ended March 2 that was the largest one-week positive inflow since July 2020, according to ICI data.

“This is a very unique environment that we’re in because you have both demand shocks and supply shocks to the system at the same time,” said Eric Marshall, a portfolio manager at Hodges Capital.

Marshall believes demand for commodities is likely to remain strong even if geopolitical tensions ebb, fueled by factors like electric car battery production, which requires metals such as copper and nickel. A $1 trillion U.S. infrastructure bill passed in November is increasing demand for steel, cement and other commodities, he said.

He is increasing his stake in steel producer Cleveland Cliffs Inc and agricultural companies Tyson Foods Inc and Archer Daniels Midland Co, while cutting positions in consumer companies most likely to feel the brunt of higher gas and materials costs.

Massive rallies in commodities have increased pressure on the Federal Reserve and other central banks to tighten monetary policy and fight inflation. This has ramped up worries that doing so will hurt economic growth as rising prices already weigh on consumers.

Investors widely expect the Fed to announce the first rate increase since 2018 at the end of its monetary policy meeting next week and have priced in 1.75 percentage points in tightening this year. Data this week showed consumer prices grew at their fastest pace last month in 40 years.

Matthew Schwab, portfolio manager of the Harbor Capital All-Weather Inflation Focus ETF, has increased his exposure to oil and metals futures. Prices for industrial metals are likely to stay high due to underproduction during the coronavirus pandemic, while oil companies appear content to trade lower production for higher prices, he said.

“You are able to see the signs of a commodity price rally in the lack of investment over the last decade,” Schwab said.

Mark Khalamayzer, lead manager of the Columbia Commodity Strategy Fund, has increased his exposure to oil and agricultural commodities to the highest limits allowed by his fund prospectus, betting that the conflict in Ukraine will lead to prices spiraling higher.

Brent crude settled at $112.67 a barrel on Friday and is up 44% since the start of the year.

Even as investors try to align their portfolios to expectations of higher raw materials prices, they are worried about how the rally in commodities could hurt growth.

The risk of a recession led by a sharp cutback in consumer spending rises the longer that oil prices stay high, said Robert Schein, chief investment officer, Blanke Schein Wealth Management.

“If oil prices stay well above $100 per barrel for a few months, the consumer and economy can withstand this, but if $100-plus oil prices last for more than six months, that’s when we will see recession risk surge,” he said.

Canadian Tire spending $3.4-billion over four years to expand products, bolster operations

Canadian Tire Corp. Ltd. CTC-T unchno change will spend $3.4-billion over the next four years to improve its e-commerce operations, launch thousands of products, expand its loyalty program and improve its supply-chain efficiency.

The Toronto-based retailer unveiled its growth strategy on Thursday, setting a goal to expand comparable sales by 4 per cent on average annually, not including fuel sales at its gas stations.

A major part of Canadian Tire’s planned investment is a $2.2-billion plan to build its digital operations. Of that, more than half will go toward stepping up digital services connected to its physical stores, including speeding up curbside pickup operations, rolling out lockers for automated pickup, and creating “connected stores” with digital appointments and more mobile-app features to help customers find what they are looking for.

“We made the strategic decision to have the core of our e-commerce strategy flow through the store,” chief executive officer Greg Hicks said in an interview Thursday, adding that the pandemic helped to demonstrate the appeal of click-and-collect pickups for online orders.

Relative to big pure-play e-commerce companies, “that’s where we were squarely advantaged,” he said.

The retailer also offers home delivery, the volume of which is now five times larger than it was in 2019.

“This is a big portion of the way we go to market in e-commerce, but it’s not really the way we’re going to differentiate. … Where we’re really advantaged is those touch-and-feel and need-it-now categories,” Mr. Hicks said, referring to the kinds of products that customers come to stores for, either because they want to see them before buying or do not want to wait for delivery.

Another $675-million of the investment will go toward improving the company’s supply chain. Canadian Tire will be adding 1.6 million square feet of warehouse space, will open a 1.3-million-square-foot facility dedicated to e-commerce fulfilment in the Greater Toronto Area and will introduce robotics into distribution centres to improve efficiency.

A big part of the investment in digital operations includes expanding the retailer’s Triangle Rewards loyalty program to encourage more repeat visits by shoppers. Canadian Tire wants to boost purchases by loyalty members – who tend to spend more – to 63 per cent of sales, from 58 per cent now.

The company has been testing an annual-fee-based program called Triangle Select that it will launch nationally this year. In exchange for the $89 fee, the program provides perks such as more Canadian Tire Money on purchases, and is designed to encourage shoppers to buy its more profitable private-label brands by attaching more attractive points offers to them.

The program will also help the company to send more personalized advertising to members, and to market its financial services business by encouraging customers to “stack” their membership with rewards from its credit cards.

Canadian Tire also plans to expand its private-label product lineup, which already draws $5.7-billion in annual retail sales with brands including Mastercraft, Paderno, Noma and Denver Hayes. The company plans to launch more than 12,000 products by 2025 across all its store chains, including Canadian Tire, Mark’s and Sport Chek.

The company’s goal is to expand its private-label brands to 43 per cent from 38 per cent of sales currently. The company’s outerwear brand, Helly Hansen, aims to triple its business in Canada and expand market share in international markets.

The significant investment in private-label brands gives Canadian Tire more visibility into supply-chain issues than some other retailers, because it works so closely with manufacturers.

Mr. Hicks added that some categories – such as those with raw materials containing oil-based products or steel – are affected more than others.

“Categories where there’s no inflation, maybe that’s where we can lean into a little bit more value for the customer,” he said. “… But inflation is real. And we for sure are going to have to pass some of it on to the customer.”

Wall Street lower as inflation hits 40-year high, inviting aggressive Fed tightening

Wall Street resumed its slide on Thursday, ending in the red as inflation hit a four-decade high, cementing expectations that the U.S. Federal Reserve would hike key interest rates at the conclusion of next week’s monetary policy meeting to prevent the economy from overheating.

Looming uncertainties surrounding Russia’s invasion of Ukraine also helped convince market participants to recommence their flight to safety.

While all three major U.S. indexes ended in the red, they pared their losses late in the day and closed well above session lows, as the U.S. equities market followed its best day in months on Wednesday by renewing a multi-session sell-off.

But the TSX managed to end higher, thanks again to a bounce in energy and materials stocks.

“It’s more of the same,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, noting that the equity market’s daily volatility is “being driven more by geopolitical than economic news.”

U.S. consumer prices surged in February to a 7.9% annual growth rate, according to the Labor Department, the hottest reading in forty years.

“The (CPI) print was not far off estimates,” Nolte added. “There will be more to come in the next month or two as some of the rising commodity prices get incorporated.”

While the market fully expects the central bank to raise the Fed funds target rate by 25 basis points at the conclusion of next week’s monetary policy meeting, the CPI data suggested the FOMC could move “more aggressively” to curb inflation in the upcoming year, as promised by Fed Chair Jerome Powell last week.

“It’s still expected the Fed will raise rates four to seven times in the next year or two to curb economic growth,” Nolte said, adding that “what complicates this, is the Fed has never raised rates with the yield curve this flat and volatility so high.”

“They’re trying to increase rates at a time when the market is in turmoil.”

Energy prices were the main culprit, with gasoline prices surging 6.6% in a single month, although the report did not reflect the entirety of spiking crude prices in the wake of Russia’s actions in Ukraine.

Those actions kept geopolitical jitters at a full boil, with peace talks showing little progress even as a humanitarian crisis unfolds and world oil supply pressures continued to weigh on global markets.

Amazon.com provided one of the day’s bright spots, its shares jumping 5.4% after the e-commerce giant announced a 20-for-1 stock split and a $10 billion share buyback.

The Dow Jones Industrial Average fell 112.18 points, or 0.34%, to 33,174.07, the S&P 500 lost 18.36 points, or 0.43%, to 4,259.52 and the Nasdaq Composite dropped 125.58 points, or 0.95%, to 13,129.96.

In contrast, the Toronto Stock Exchange’s S&P/TSX composite index ended up 88.47 points, or 0.4%, at 21,581.70, its highest closing level since Feb. 9.

“It’s the combination that it’s not yet a recession and we have commodity-driven inflation that I think has accounted for the TSX outperformance,” said Kurt Reiman, senior investment strategist for North America, BlackRock.

“Canada is a large exporter of many of the same exports that you see coming out of Russia and Ukraine.”

The TSX has gained 1.7% since the start of 2021, compared with a 10.6% decline for U.S. benchmark the S&P 500.

The TSX energy sector rose 1.7% even as oil prices declined.

The TSX materials group, which includes precious and base metals miners and fertilizer companies, added 2.3%, but technology shares were unable to build on the pervious day’s rally, losing 2.1%. Heavily weighted financials ended 0.1% lower.

In the U.S., six the 11 major sectors in the S&P 500 closed in negative territory with tech suffered the biggest percentage drop, while energy shares saw the largest gain.

The NYSE FANG+ index of market leading tech and tech-adjacent megacaps fell 2.1%.

Goldman Sachs Group Inc became the first major U.S. investment bank to announce it was closing operations in Russia. Its shares dropped 1.1%.

The S&P 500 banking index slid 1.0%.

Oracle Corp dipped nearly 6% in after-hours trading after the business software and cloud computing firm posted quarterly results.

Declining issues outnumbered advancing ones on the NYSE by a 1.62-to-1 ratio; on Nasdaq, a 1.72-to-1 ratio favored decliners. The S&P 500 posted 5 new 52-week highs and 12 new lows; the Nasdaq Composite recorded 28 new highs and 163 new lows. Volume on U.S. exchanges was 12.50 billion shares, compared with the 13.65 billion average over the last 20 trading days.

In the bond market, the benchmark U.S. 10-year Treasury yield rose on Thursday and topped 2% for the first time in two weeks after U.S. inflation data confirmed rapidly rising prices.

Expectations that the Fed will raise its benchmark overnight interest rate by at least 25 basis points on March 16 stand at 94%, according to CME’s FedWatch Tool.

The yield on 10-year Treasury notes was up 6.3 basis points to 2.011% after hitting 2.021%, its highest level since Feb. 17. The 10-year yield is on track to climb for a fourth straight day, its longest streak of gains in a month.

Oil prices settled lower after a volatile session, a day after its biggest daily dive in two years, as Russia pledged to fulfil contractual obligations and some traders said supply disruption concerns were overdone.

Since Russia’s Feb. 24 invasion of Ukraine, oil markets have been the most volatile in two years. On Wednesday, global benchmark Brent crude posted its biggest daily decline since April, 2020. Two days earlier, it hit a 14-year high at over $139 a barrel.

Brent futures fell $1.81, or 1.6%, to settle at $109.33 a barrel after gaining as much as 6.5% earlier in the session. U.S. West Texas Intermediate (WTI) crude fell $2.68, or 2.5%, to settle at $106.02 a barrel, giving up over 5.7% of intraday gains.

“I think some of the ‘war angst’ is coming out of the market,” said John Kilduff, partner at Again Capital in New York. “We rejected $130 twice this week. People are beginning to ask if there really is too much of a supply problem. There’s still plenty of Russian supply,” he said.

Russian President Vladimir Putin told a meeting that the country, a major energy producer which supplies a third of Europe’s gas and 7% of global oil, would continue to meet its contractual obligations on energy supplies.

However, oil from the world’s second-largest crude exporter is being shunned over its invasion of Ukraine, and many are uncertain where replacement supply will come from. Comments from United Arab Emirates (UAE) officials sent conflicting signals, adding to the volatility.

On Wednesday, Brent slumped 13% after the UAE’s ambassador to Washington said his country would encourage the Organization of the Petroleum Exporting Countries to consider higher output.

UAE Energy Minister Suhail al-Mazrouei backtracked on the ambassador’s statement and said the OPEC member is committed to existing agreements with the group to boost output by only 400,000 barrels per day (bpd) each month.

While the UAE and Saudi Arabia have spare capacity, some other producers in the OPEC+ alliance are struggling to meet output targets because of infrastructure underinvestment in recent years.

The United States made moves to ease sanctions on Venezuelan oil and efforts to seal a nuclear deal with Tehran, which could lead to increased oil supply. The market also anticipates further stockpile releases coordinated by the International Energy Agency and growing U.S. output.

“With some goodwill, co-ordination and luck, the supply shock can greatly be mitigated but probably not neutralised,” PVM oil market analyst Tamas Varga said.

Still, traders refused to call the oil rally over. Some said the recent slump could be due partly to profit-taking, noting oil remained up over 15% since the Ukraine invasion.

“We will probably have more speculation and some people who want to sell to take advantage, but we’re just in new territory here,” said Thomas Saal, senior vice president for energy at StoneX Financial Inc.

“The pattern does not look like we are at the top yet. Just when you think we are, the market finds new energy to go higher,” he said.

Inflation rose 7.9% in February, as food and energy costs push prices to highest in more than 40 years

Inflation grew worse in February amid the escalating crisis in Ukraine and price pressures that became more entrenched.

The consumer price index, which measures a wide-ranging basket of goods and services, increased 7.9% over the past 12 months, a fresh 40-year high for the closely followed gauge.

The February acceleration was the fastest pace since January1982, back when the U.S. economy confronted the twin threat of higher inflation and reduced economic growth.

On a month-over-month basis, the CPI gain was 0.8%. Economists surveyed by Dow Jones had expected headline inflation to increase 7.8% for the year and 0.7% for the month.

Food prices rose 1% and food at home jumped 1.4%, both the fastest monthly gains since April 2020, in the early days of the Covid-19 pandemic.

Energy also was at the forefront of ballooning prices, up 3.5% for February and accounting for about one-third of the headline gain. Shelter costs, which account for about one-third of the CPI weighting, accelerated another 0.5%, for a 12-month gain of 4.7%.

Excluding volatile food and energy prices, so-called core inflation rose 6.4%, in line with estimates and the highest since August 1982. On a monthly basis, core CPI was up 0.5, also consistent with Wall Street expectations.

The inflation surge is in keeping with price gains over the past year. Inflation has roared higher amid an unprecedented government spending blitz coupled with persistent supply-chain disruptions that have been unable to keep up with stimulus-fueled demand, particularly for goods over services.

Vehicle costs have been a powerful force, but showed signs of easing in February. Used car and truck prices actually declined 0.2%, their first negative showing since September, but are still up 41.2% over the past year. New car prices rise 0.3% for the month and 12.4% over the 12-month period.

A raging crisis in Europe has only fed into the price pressures, as sanctions against Russia have coincided with surging gasoline costs. Prices at the pump are up about 24% over just the past month and 53% in the past year, according to AAA.

Moreover, business are raising costs to keep up with the price of raw goods and increasing pay in a historically tight labor market in which there are about 4.8 million more job openings than there are available workers.

Recent surveys, including one this week from the National Federation for Independent Business, show a record level of smaller companies are raising prices to cope with surging costs.

To try to stem the trend, the Federal Reserve is expected next week to announce the first of a series of interest rate hikes aimed at slowing inflation. It will be the first time the central bank has raised rates in more than three years, and mark a reversal of a zero-interest-rate policy and unprecedented levels of cash injections for an economy that in 2021 grew at its fastest pace in 37 years.

However, inflation is not a U.S.-centric story.

Global prices are subject to many of the same factors hitting the domestic economy, and central banks are responding in kind. On Thursday, the European Central Bank said it was not moving its benchmark interest rate but would end its own asset purchase program sooner than planned.

Consumer inflation was likely high in February, and rising fuel prices will turn up the pressure

February’s consumer price index is the last important look at inflation before Federal Reserve officials meet next week, and it’s going to be a scorcher.

Economists expect headline inflation rose 0.7% last month, or 7.8% on an annualized basis, according to estimates from Dow Jones. That’s compared to January’s increase of 0.6% or 7.5% year over year. Excluding energy and food, core CPI was expected to be up 0.5%, below January’s 0.6% gain. Core inflation is expected to be 6.4% year over year, up from 6%. CPI is released Thursday at 8:30 a.m. ET.WATCH NOWVIDEO03:17Neuberger Berman’s Jamie Iselin says investors can get competitive return despite inflation

The data is especially important to markets because it is the last major economic report for the Fed to consider before it begins its two-day meeting, starting Tuesday. Regardless of what the data shows, the central bank is widely expected to raise interest rates by a quarter point from zero, the first in a series of expected rate hikes.

The producer price index will be released on Tuesday, but the Fed is more concerned with the consumer price number.https://datawrapper.dwcdn.net/4GMfo/1/

“We think the market will be a little more reactive to an upside miss than a downside miss, but it is the last big data point before the Fed so you can’t ignore it,” said Wells Fargo’s Michael Schumacher.

Higher gas prices begin to trickle in

Some of the recent spike in gasoline prices should be included in the data, but more of the run-up should appear in March and April. Economists had expected inflation to peak in March, but now they say it could be later in the spring before it tops out. The national average price for a gallon of unleaded gasoline Wednesday was a record $4.25, up 60 cents in a week and up nearly 80 cents over the past month, according to AAA.

“Gasoline prices moved somewhat higher in the last days of February, enough to nudge my headline CPI forecast up by a tenth to +0.8%, but the bulk of the pain will be felt in March and April,” said Stephen Stanley, chief economist at Amherst Pierpont.

Stanley forecasts February’s headline CPI will be up 7.9% year over year. He expects March’s CPI will be at least a percentage point higher, just under 9%.

“I expect the energy price spike to prove mostly temporary, so that we may see some relief by midyear, depending on how long it takes for the war in Ukraine to be resolved and how long it takes other oil and gas suppliers to step in and backfill Russia’s sanctioned exports,” Stanley added in a report.

Kevin Cummins, NatWest Markets chief U.S. economist, said he had expected inflation to be driven by the service sector this year, but now it looks like it will be energy, at least in the near term.

Oil has been on a tear, topping $130 per barrel earlier this week. On Wednesday, West Texas Intermediate crude futures were trading at about $109 per barrel.

Oil prices were sharply lower Wednesday on a report that the United Arab Emirates, an OPEC member, was open to production increases. But even so, as long as the Ukraine conflict continues, Russian oil will be impaired and that is likely to keep prices high, according to oil analysts.

The Fed and inflation

Cummins said the Fed should move forward with its March rate hike and could do several more before summer. “I think they’re more worried about the inflation side of their mandate than they are about growth right now. The economy can sustain higher rates,” he said.

He said CPI could get very hot quickly if oil prices were to move sharply higher. For instance, if oil hits $200 per barrel, CPI could be at 9.7% by April, and that is not considering how much higher oil prices could affect the price of other goods. At $125 per barrel, Cummins said inflation could be 8%.

The important number to watch in the November report is the core month-over-month increase. If it is weaker than last month, that is a positive, but if some elements of core inflation are pushing it higher, that could be worrisome for the Fed.

“The last two months were 0.6% on the core, but if they get a 0.4% that’s probably a win,” Cummins said. He expects the Fed to forecast four to five hikes in its new economic projections, expected to be released Wednesday.

A slower pace of core inflation could mean that some of the supply chain issues that helped push inflation higher are ebbing, Cummins said. If the semiconductor shortage eases, for example, that would help vehicle prices steady. Elsewhere, the cost of services and rents are still expected to rise.

“Rents are not going to go down. We’ve got them up 0.4%. If anything, you have lags. You have exceptionally strong home prices. The rental vacancy rate is low, and you have a strong labor market. That’s probably the biggest thing,” he said.

BEFORE THE BELL: MARCH 10, 2022 AM

Equities

Wall Street futures were down early Thursday after the previous session’s sharp rally with investors awaiting the latest reading on U.S. inflation. Major European markets also gave back some of yesterday’s gains with the Russia-Ukraine war still in focus. TSX futures were down modestly with crude prices rising.

Futures tied to the three major U.S. indexes were all in the red in the early premarket period. On Wednesday, all three spiked with the Nasdaq finishing up 3.6 per cent while the S&P 500 saw its best day since mid-2020.

“I’d be surprised if it [this week’s rally] is sustained for any significant period of time unless we see actual progress towards a ceasefire and Russian exit,” OANDA senior analyst Craig Erlam said in a note.

He said Wednesday’s gains may have been “a hopeful rally rather than one built on solid foundations but it’s the first glimmer of hope we’ve had in weeks.”

In the U.S., traders will be keeping a close eye on the inflationary picture in the United States. February CPI data is due before the bell and economists are forecasting the annual rate of inflation will spike to 7.9 per cent.

“Given the actual circumstances, it is of course very well possible that we see an unpleasant surprise, which would send the U.S. inflation above the 8-per-cent psychological mark,” Swissquote senior analyst Ipek Ozkardeskaya said.

“The question is, by how much the rise in inflation could change the Federal Reserve (Fed) expectations.”

The Federal Reserve makes its next policy decision next week. Economists are still expecting a quarter point increase despite current global uncertainty.

STORY CONTINUES BELOW ADVERTISEMENT

In this country, investors will get results from travel company Transat AT ahead of the start of trading. Earlier this week, Air Transat and Porter Airlines announced they have signed a code-sharing agreement they hope will draw customers to a wider range of connecting flights in Canada and abroad.

Overseas, the pan-European STOXX 600 was down 1.28 per cent, reversing at least of some of the previous session’s gains. Markets are awaiting the European Central Bank’s next policy announcement early Thursday. Economists are expecting few policy commitments amid the escalating Russia-Ukraine crisis.

Britain’s FTSE 100 fell 1.12 per cent. Germany’s DAX and France’s CAC 40 were down 2 per cent and 2.14 per cent, respectively.

In Asia, Japan’s Nikkei spiked 3.94 per cent in the wake of the previous session’s rally on Wall Street. Hong Kong’s Hang Seng rose 1.27 per cent.

Commodities

Crude prices gained in a choppy session as traders weigh the possibility of world producers moving to hike output in the wake of sanctions on Russian crude.

The day range on Brent is US$110.20 to US$117.37. The range on West Texas Intermediate US$107.01 to US$113.48. On Wednesday, Brent fell 13 per cent, its biggest drop in two years. WTI lost 12.5 per cent.

“Volatility continues to be the winner overnight, particularly in the commodity space as the street engaged in its latest grasping at straws attempt to price in ‘peak-Ukraine’,” OANDA senior analyst Jeffrey Halley said.

Reuters reports that markets got conflicting signals on whether producers would step up production.

UAE Energy Minister Suhail al-Mazrouei said on Twitter late on Wednesday his country is committed to the existing agreement by the Organization of the Petroleum Exporting Countries and allies to ramp up oil supply by 400,000 barrels per day monthly following sharp cuts in 2020.

Hours earlier, prices fell on comments from UAE’s ambassador to Washington saying his country will be encouraging OPEC to consider higher output to fill the supply gap due to sanctions on Russia, Reuters reported.

“To suggest the oil market is confused would be an understatement as we are in an unprecedented situation,” Stephen Innes, managing partner at SPI Asset Management, said.

Gold prices, meanwhile, were down.

Spot gold were off 0.5 per cent at US$1,981.96 per ounce by early Thursday morning after dropping as much as 1 per cent. U.S. gold futures were unchanged at US$1,988.60. Gold fell about 3 per cent on Wednesday, seeing its worst intraday drop in more than a year.

Currencies

The Canadian dollar was weaker while its U.S. counterpart edged higher against a basket of currencies.

The day range on the loonie is 77.86 US cents to 78.18 US cents.

On global markets, the U.S. dollar index was up 0.2 per cent ahead of the latest U.S. inflation figures. The index, which weighs the greenback against a selection of world currencies, lost 1.17 per cent on Wednesday.

The euro was trading at US$1.10489, down 0.32 per cent after jumping 1.6 per cent on Wednesday, its best day since June 2016, according to figures from Reuters.

Britain’s pound was down 0.2 per cent at US$1.3159 after jumping 0.65 per cent overnight.

More company news

Amazon.com Inc said its board approved a 20-for-1 split of the e-commerce giant’s common stock and authorized a US$10-billion buyback plan. This is the first stock split by Amazon since 1999 and will give investors 19 additional shares for every share they hold. Trading based on the new share price will begin on June 6. Shares were up nearly 6 per cent in premarket trading. The news was announced after Wednesday’s close.

Economic news

ECB Monetary Policy meeting

(8:30 a.m. ET) U.S. initial jobless claims for week of March 5.

(8:30 a.m. ET) U.S. CPI for February.

With Reuters and The Canadian Press