Stocks rally as Ukraine, Fed policy remain in focus

But Federal Reserve Chair Jerome H. Powell said it would still be reasonable to raise rates in March, citing “inflation well above 2 percent and a strong labor market” in remarks prepared for the House Financial Services Committee. Powell indicated he would support the central bank raising its benchmark interest rate 25 basis points (lower than many investors had priced in) if inflation continues to heat up.

After dropping sharply Tuesday, the Dow rebounded more than 2 percent, or 700 points in afternoon trading Wednesday. The broader S&P 500 also gained more than 2.1 percent, while the tech-heavy Nasdaq advanced 1.8 percent.

“Russia’s invasion of Ukraine, its impact on global energy prices, potential to fuel inflation and possible hit to economic growth as economic sanctions take effect is clearly prompting a shift in investors’ expectations,” Russ Mould, investment director at AJ Bell, said Wednesday in comments emailed to The Washington Post.

European indexes, which have sold off sharply as businesses felt the weight of sanctions, also recovered Wednesday. Europe is heavily reliant on Russia for oil and gas, as well as other critical commodities. The benchmark Stoxx 600 index closed up 0.9 percent, while France’s CAC40 gained nearly 1.6 percent. Britain’s FTSE100 closed up more than 1.3 percent.

Government bonds, an investor safe haven, also edged higher in response to Powell’s testimony, with the yield on the 10-Year U.S. Treasury note climbing to 1.861 percent. Bond yields move inversely to prices.

Gold, a Russian export and another investor safe haven, swung 0.8 percent lower but remained extremely elevated, trading around $1,926.70 per troy ounce.

Sentiments had been improving before the invasion, as investors rejoiced in steady corporate earnings and employment reports as evidence that the omicron variant had weighed less on the economic recovery than many had feared. ADP’s private payrolls report provided fresh optimism about the strength of the labor market ahead of the February jobs report, which will be released Friday. The payroll processing company reported that private employers added 475,000 positions last month, topping analyst expectations.

As March trading gets underway, stocks are likely to see a continuation of the volatility that has dominated in 2022, analysts say. Companies were already being vexed by labor shortages, a deeply distressed global supply chain, soaring inflation and the coronavirus pandemic’s continued threats before the crisis in Ukraine.

Earlier this week the U.S. government and its European allies introduced massive penalties that banned all people in the United States and European Union from trading with Russia’s central bank. The sanctions also apply to Russia’s Finance Ministry and its sovereign wealth fund. In recent days, officials had also moved to bar several major Russian banks from SWIFT (a global monetary transfer service), crack down on Russian oligarchs and prevent Russia’s central bank from bailing out the domestic economy. The United States joined Europe and Canada on Tuesday in closing its airspace to Russia — a move Russia has reciprocated, which is likely to jack up travel costs.

Oil prices continued their explosive ride, booming more than 8 percent in premarket trading in the wake of news that the International Energy Agency was releasing 60 million barrels of oil reserves to relieve some market pressure. Brent crude, the international oil benchmark, was trading around $113 per barrel. West Texas Intermediate, the U.S. oil benchmark, was trading around $111 per barrel. Both have been pushed past seven-year highs amid the fears of disruption.

“While it appears that the [U.S.] market is somewhat immune to the sanctions, the oil element is more of a wild card,” Chris Larkin, managing director of trading at E-Trade from Morgan Stanley, said Wednesday in comments emailed to The Post. “If the Russian invasion disrupts oil supplies, the trickledown effect could be significant.”

Putin has promised a tough response to sanctions, which he called “illegitimate.” Putin put Russia’s nuclear force on higher alert, a move quickly condemned by the United States and NATO. U.S. businesses have been warned to prepare for possible cyberattacks, and President Biden has acknowledged the crisis could lead to higher gasoline prices but said that limiting the pain Americans feel at the pump is “critical.”

Oil prices had already spiked more than 40 percent since December, largely boosted by inventory pressures and Russia’s threats toward Ukraine. The national average for a gallon of gas in the U.S. crested at $3.65 on Wednesday, up from $3.39 a month ago according to AAA.

OPEC, the cartel of oil producing nations, said Wednesday that it would not dramatically increase oil output in response to the crisis in Ukraine, opting instead to stick to an earlier plan to increase the daily output by 400,000 barrels next month. It has been gradually adding that much oil each month to correct drawdowns that occurred earlier in the pandemic, when demand for fuel plummeted.

A significant increase in output might have taken some of the pressure off of global energy markets. But OPEC concluded that such an infusion was unecessary because the current market turmoil is tied to geopolitical events. Market fundamentals were sound, the group said in a press statement.

Powerhouse Russian stocks cratered Wednesday, with London-listed giants Lukoil sinking 95 percent and Gazprom plunging more than 50 percent. Russian markets were closed for the third straight day as the Bank of Russia tried to keep money from flooding out of its economy, which was already showing signs of severe distress before the new measures were implemented. Last week, as the incursion into Ukraine unfolded, Moscow’s MOEX index endured one of the steepest equity crashes in its stock market history.

So far, government sanctions have stopped short of targeting Russia’s energy sector in a meaningful way. Sanctions on Russian oil would slash the global supply (which was already facing inventory problems before the conflict) and cause further price spikes, according to Anthony Denier, CEO of trading platform Webull.

“This could be the catalyst for a global economic slowdown. And it’s not just oil,” Denier said Wednesday in comments emailed to The Post. “Russia and Ukraine together produce 25 percent of the world’s wheat. If international shipments are shut off, we can expect supply shortages and surging food prices. This will hurt consumers in Europe and around the world, even possibly in the U.S.”

Wheat futures boomed to a 14-year high Tuesday, according to MarketWatch. Aluminum, nickel and corn, other commodities tied to Russia and Ukraine, have also been pushed to multiyear highs.

Aaron Gregg contributed to this report.