Questions over the credibility of a Russian promise to pull back some troops in Ukraine were hurting European markets more than London by midday on Wednesday, but a market signal of a possible recession in the US was providing a source of worry for all market participants.
In Paris, the CAC 40 index was down 0.9%, while the DAX 40 in Frankfurt fell 1.4%. In Milan, the MIB 40 index was down 0.3%. The markets all had closed higher on Tuesday, following the Russian announcement.
The FTSE 100 index was down just 3.53 points, essentially flat, at 7,533.72 midday Wednesday. The mid-cap FTSE 250 index slipped 290.41 points, or 1.4%, to 21,201.56. The AIM All-Share index was down 2.03 points, 0.2%, at 1,044.36.
The Cboe UK 100 index was up 0.1% at 749.91. The Cboe 250 was down 1.4% at 18,732.88, and the Cboe Small Companies was flat at 15,351.02.
Russia pledged to scale down fighting around Kyiv and a second major city following peace talks on Tuesday that Ukraine's leader said showed ‘positive’ signs, but Western allies made clear their doubts over Moscow's intentions.
The US cast clear doubt on Moscow's words, and vowed with fellow Western powers to keep ‘raising the costs’ on Russia.
And by Tuesday evening, Ukraine's general staff - while confirming Russian units were withdrawing from the Kyiv and Chernigiv regions - said it was most likely a troop rotation intended to ‘mislead’ Ukraine's military.
Traders also were paying attention to US bond markets. In a potentially worrying development, the US Treasury curve yield inverted.
A normal yield curve would show that bonds with a longer maturity offer higher yields, while instruments with shorter maturity offer less chunky rewards. The opposite is true with an inverted yield curve - shorter-dated bonds pay more than those with a longer maturity.
AJ Bell analyst Russ Mould noted that an inverted US treasury yield curve sparks fears of a recession.
‘Last night, the yield on two-year US government bonds rose above that of the 10-year note, causing an inverted yield curve - something that has historically preceded a recession. Traditionally, investors demand a higher return and therefore a higher yield on longer dated bonds than shorter dated ones as compensation for the greater risks from inflation and issuer default,’ Mould explained.
‘Therefore, to see higher yields on shorter dated bonds versus longer-dated ones is less common, and hence why investors sit up and take notice when it happens. Yesterday's event was the first time it has occurred with US treasuries since 2019. Investors shouldn't be surprised at the recession warning, given the soaring cost of living and how inflationary pressures threaten to dampen economic activity.’
Mould continued: ‘Central banks have already started the typical course of action when you have high inflation, namely putting up interest rates. They will need to walk a careful path, not being too aggressive with the pace and scale of rate rises so that it chokes off the economy. The US Federal Reserve is being watched the closest, as there appears to be a growing risk that it does too much too fast.’
In the US calendar, the latest ADP jobs report is released at 1315 BST, before US gross domestic product data at 1330 BST.
Ahead of the economic data, the dollar was largely on the back foot, despite the slightly cautious mood in global markets on Wednesday.
The pound was quoted at $1.3134 midday Wednesday in London, flat from $1.3135 late Tuesday. The euro stood at $1.1123, up from $1.1113. Against the yen, the dollar was trading at JP¥121.85, down from JP¥122.57.
US equities were called to open lower. The Dow Jones Industrial Average was called down 0.3%, the S&P 500 down 0.4%, and the Nasdaq Composite down 0.6%.
Brent oil was quoted at $112.26 a barrel midday Wednesday in London, up from $109.35 at the European equities close on Tuesday.
Shell was the best blue-chip performer in London, rising 3.3%. A strong showing from the mining sector also buttressed the FTSE, Anglo American was up 2.8%.
In a sign of a move to defensive stocks, British American Tobacco rose 0.5% and Imperial Brands added 0.4%.
The retail sector struggled, conversely, with JD Sports down 3.5% and Next falling 2.6%.
Pearson dropped 11% to 698.40 pence. The education publisher said a third takeover proposal made by Apollo Global Management ‘significantly’ undervalued the company and its future prospects.
Pearson therefore rejected the offer by the New York-based private equity and investment management firm, it said. Apollo previously confirmed that it now doesn't intend to make a formal offer for Pearson.
Pearson said the third proposal by Apollo was 884.2 pence per share in cash. This price included a 2021 dividend of 14.2p per share.
John Menzies accepted a takeover offer, meanwhile. Shares were up 3.9% at 592.33p.
The aviation services firm accepted a formal takeover offer from GIL International Holdings V, a subsidiary of Kuwait's Agility Public Warehousing.
The deal, at 680 pence per share, values John Menzies at £571 million on a fully diluted basis and offers an enterprise value of £763 million.
John Menzies has a market value of £544.5 million.
The deal ends a long-running saga. Back in early-February, Menzies said it rejected a 510p bid from its Kuwaiti suitor. It followed a previous unsolicited cash offer of 460p a share, the company explained.
Polymetal International shares climbed 11%. The gold miner said its operations in Russia and Kazakhstan continued undisputed, despite the impact of sanctions.
The St Petersburg-based miner focused on Russia and Kazakhstan said sanctions announced between March 9 and 30 have had no material impact on its business.
Polymetal said it believes that targeted sanctions on the company remain ‘unlikely, but are not impossible’. It added that contingency planning has been initiated to maintain business continuity.
On Tuesday, the company said it was evaluation a corporate structure in the face of Western sanctions against Russia following its invasion of Ukraine.
Gold stood at $1,920.82 an ounce midday Wednesday, up from $1,910.78 late Tuesday.
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