S&P 500 pares early gains, drops back under 4250 with investors skeptical of Putin positivity

• US equities traded in choppy, mixed fashion on the final trading day of what has been an indecisive week.
• The S&P 500 opened 0.5% higher following positive Putin commentary on Ukraine, but skeptical investors have since pared these gains.

US equities traded in choppy, mixed fashion on the final trading day of what has been an indecisive week. The S&P 500 opened about 0.5% higher as risk appetite got a pre-open boost by commentary from Russian President Vladimir Putin, who noted a positive shift in the rhetoric coming from Ukrainian officials in recent days. But investors have learned not to take comments from President Putin, or any other Russian officials, at face value in recent weeks, and the optimism was quickly pared. The index, which managed to nearly test its Tuesday highs at 4300 has now reversed back under the 4250 level, where it now trades about 0.3% lower.

Comments from the Ukrainian Foreign Minister Dmytro Kuleba suggesting that “zero” progress had been made in talks with Russian Foreign Minister Sergey Lavrov on Thursday highlighted just how difficult it is to guage the possibility that a diplomatic solution to the war might be found. For now, investors aren’t banking on it, which is probably one reason why the demand to push the S&P 500 back above 4300 just isn't there. Indeed, as the West continues to tighten the sanctions noose on Russia (G7 nations on Friday removed Russia’s preferred nation trading status and are lobbying to restrict the country’s IMF and World Bank access), fears about the economic impact of the conflict are likely to linger.

In terms of the other major US indices, the Nasdaq 100 was down 0.9% and back below the 13,500 level while the Dow has managed to maintain a modestly positive trading bias and is trading 0.2% higher in the 33,200s. Traders said that recent US bond yields upside, helped along by a combination of this week’s hot US Consumer Price Inflation reading that solidified expectations for a series of Fed rate hikes this year starting next week and higher inflation expectations, is behind the underperformance of the heavily big tech/growth stock weighted Nasdaq 100 index versus the more cyclical/value weighted Dow.

Geopolitics remains the main equity market driver next week. Traders are assessing the prospect for high-level Russo-Ukraine talks delivering some much-needed de-escalation (seems unlikely right now) as speculation about a potential Putin/Zelenskyy meeting build. But concerns are also mounting that Russia might turn up the heat in the conflict by using chemical/biological weapons, which could trigger a furious reaction from the international community. But there will also be plenty on Wednesday’s Fed meeting and US Retail Sales. The fact that the Ukraine conflict comes at a time when the Fed is tightening to contain multi-decade high inflation (and unable to shift dovishly without losing all credibility) is a serious worry to investors.