S&P 500 remains supported above 4400 but on the defensive as geopolitical tensions remain elevated

• US equities are trading mixed/on the defensive after hawkish Fed speak and as Russia/Ukraine/NATO tensions remain elevated.
• The S&P 500 is down 0.3%, the Nasdaq 100 up 0.3% and the Dow down 0.5%.  

US equity markets opened this week’s trade mixed, with the S&P 500 down 0.3%, the Nasdaq 100 up 0.3% and the Dow down 0.4%. The S&P 500 CBOE volatility index remained elevated near the 30.0 level, up about 2.0 points on the day, with equity index futures trade prior to Monday’s US open choppy. Futures had initially been under pressure amid fears of further escalation in Russia/Ukraine/NATO tensions and the potential for war to break out as soon as later this week (according to the US press reports citing US intelligence).

S&P 500 futures had dipped as lower as the 4360s, where they traded down about 1.4% at the time. However, a Monday meeting between Russian President Vladimir Putin and Russian Foreign Minister Sergey Lavrov, where the latter recommended continuing with diplomacy, for now, seemed to ease fears somewhat, sending S&P 500 futures momentarily back into the green above 4420. Futures wouldn’t remain in the green for long, with comments from hawkish FOMC member (and 2022 voter) James Bullard upping Fed tightening bets and pushing futures back towards 4400, above which the index has found support during cash trade.

Bullard doubled down on the call he made last week for the Fed to lift interest by 100bps by July 1. According to the CME Fed Watch tool, the implied odds of a 50bps Fed rate hike rose to 66% from closer to 50% prior to his remarks. Other Fed members have pushed back against the idea of a larger 50bps move, seemingly expressing a preference for more measures 25bps moves. Upcoming US data out this week, including Tuesday’s January Producer Price Inflation report and Wednesday’s January Retail Sales figures will be scrutinized in the context of how it might impact expectations about the pace of Fed tightening. Wednesday’s FOMC minutes of the January meeting will also be closely watched.

But the main driver of broad risk appetite is likely to remain geopolitical tensions in Eastern Europe. A meeting between German Chancellor Olaf Scholz and Russian President Vladimir Putin in Moscow on Tuesday has been flagged as a key date. If the meeting doesn’t yield any progress towards a deal to de-escalate tensions, that could be a “green flag” for Russia to mount a military offensive against Ukraine, with US press having hinted an attack could begin later this week. A war involving Russia so close to NATO borders in Eastern Europe inevitably triggers fears of broader escalation into nuclear conflict and remains a downside risk to US equities.