S&P 500 recovers back to flat near 4470 post-“dovish” Fed minutes, ignores flurry of negative geopol headlines

• The S&P 500 is flat, having rebounded to around 4470 in wake of “dovish” Fed minutes despite negative geopolitical headlines.
• The index had been trading lower prior to the minutes release after hot US Retail Sales bolstered Fed tightening bets.

The release of the Fed minutes of the January 25-26 meeting followed shortly thereafter by a flurry of headlines relating to US/NATO concerns about continued Russian military build-up on Ukraine’s border has made for choppy US equity market trading conditions. Markets seem to have interpreted the minutes as dovish, helping spur a rebound from earlier session lows. The S&P 500 now trading in the 4470 area and close to session highs at 4480 where it trades flat on the day, having previously been as low as the 4430 mark, where it at the time was trading down by about 0.8%. A stronger than expected US January Retail Sales report on Wednesday released prior to the US open was said to have been weighing on stocks earlier in the session as it boosts the likelihood of a more aggressive Fed.

The minutes of the last Fed meeting did not seemingly indicate any desire to lift rates at a faster than usual pace of 25bps per minute, which may explain the dovish market reaction. Indeed, US money markets have revised lower the implied odds of a 50bps move at next month’s meeting to about 44% versus nearly 60% on Tuesday. However, analysts have noted that the latest upside Consumer and Producer Price Inflation surprises have likely rendered the opinions seen in the latest minutes release as out of date. Recall that in wake of the release of the January CPI report, Fed policymakers (and 2022 voter) James Bullard said he had become much more hawkish.

That is to say, perhaps stock markets shouldn’t read too much into the latest minutes release, and should pay more attention to what Fed members are saying right now, with their comments reflective of the most recent economic developments. On which note, there is plenty of Fed speak on Thursday and Friday. While the Fed minutes release has distracted attention momentarily from further negative geopolitical headlines, investors may soon start fretting about Russia/Ukraine war risk.

Shortly after the Fed minutes were released, US officials were again on the wires warning that despite Russia pledged to partially withdraw troops from the Ukraine border, it is actually seeing a build-up. Ukrainian and Estonian intelligence reports on Wednesday have concurred with this analysis, with the intelligence chief of the latter recently saying that 10 new Russian battlegroups were moving to the Ukraine border to join the 100 already there. The intelligence chief echoed US warnings that an escalation to the fighting in the Eastern Ukraine breakaway provinces located in the Donbas is considered highly likely.

Looking back at US equities, the Nasdaq 100 index has swung within a 14.4-14.6K range and currently trades in the mid-14.5K area, down about 0.5% on the day. The Dow, meanwhile, has swung between the 34.7-35.0K levels and currently trades in the 34.8K area, down about 0.3% on the day. The S&P 500 CBOE Volatility Index (or VIX) is about one point lower and has dipped back under 25.0 again. Attention remains very much on the geopolitical situation.