Risk sentiment improves, but to be short-livedGlobal risk sentiment improved late on Wednesday and into early Thursday as US Federal Reserve Chair indicated rates might rise, but less aggressively due to the Russia-Ukraine war, which will likely cap those gains.Elevated crude oil prices, which flew past $110, kept investors cautious tracking the Russia-Ukraine war, pushing for the US dollar to be well bid.Traders said with oil marketing companies yet to on-pass the recent increases in global crude oil prices to consumers, risks of inflation surging in coming months has risen significantly.That is an ominous sign for already-high global inflation.”So far, investors appear to be discounting a greater chance of “stagflation-lite”, meaning sanctions result in even more inflation in developed markets and a bit less economic growth,” Thomas Mathews, a markets economist at Capital Economics, told Reuters.While Asian equities rose after Wall Street shares eked out small gains after worries eased of aggressive Fed rate hikes, Chair Jerome Powell said the Ukraine war has made the outlook “highly uncertain.””In his semi-annual testimony to Congress, Fed Chair Powell noted that although he was inclined to propose a 25bp hike at the March meeting if inflation came in higher and stayed higher, the Fed was open to hiking by more than this either at that meeting or subsequent meetings,” said Robert Carnell, Regional Head of Research for Asia-Pacific at ING.”Markets have reacted positively to the remarks, which is a debatable interpretation of Powell’s nuanced comments, with equities rising and bond yields moving sharply higher after their decline the day before. Volatility is the key here, and uncertainty. This isn’t going to go away any time soon,” he added.Gold prices rose on an increased flight to safety bets, underscoring cautious mood amongst investors.”Safe-haven buying and inflation concerns have also kept prices higher; however, stability in the equity market has kept a check on the upside. Gold may remain volatile as Russia-Ukraine situation is assessed; however, safe-haven buying may keep prices supported,” said Ravindra Rao, Head of Commodity Research at Kotak Securities.
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