• Wall Street in sharp reversal as fears over Ukraine fallout ease a little
• Global equities also perk up, dollar retreats slightly, but oil extends gains
• Immediate focus back on inflation and Fed policy ahead of US data

After a highly turbulent week, the mood brightened somewhat on Friday even as the tragedy unfolded in Ukraine. Stock markets around the world were rebounding from yesterday’s dramatic selloff when Russia invaded Ukraine, which prompted a huge flight to safety. Risk assets were in slightly better shape today, while safe havens such as gold and the US dollar were off their highs.

However, with Russian troops reportedly closing in on Ukraine’s capital, Kyiv, the conflict could get a lot messier and the West may have to respond with even tougher sanctions than the ones announced yesterday.

Sanctions by the United States, Britain, the European Union and others have so far mostly targeted Russian banks and individuals with close links to the Kremlin, freezing their assets and imposing travel curbs, in addition to imposing restrictions on sensitive exports. But Western leaders could not agree on the more ‘nuclear’ option of banning Russia from the international payments system SWIFT that could potentially have crippling effects on the country’s economy. They also stopped short of banning Russian oil and gas exports.

This likely came as a relief for investors as it limits the economic fallout from the crisis, at least in the short term. Moreover, after the S&P 500 entered correction territory, this was another opportunity for bargain hunters to ‘buy the dip’.

The rebound was led by technology companies as the ‘big tech’ favourites, with the exception of Apple, all rallied by at least 4%, lifting the Nasdaq Composite from a 3.5% loss to a 3.3% gain. The S&P 500 closed up 1.5% but the Dow Jones could only manage to rise by 0.3%.

Shares in Asia were boosted by Wall Street’s reversal, and a large cash injection by China’s central bank further bolstered sentiment. European stocks opened higher too, but the rally already seems to be fading as US futures have been in the red today.

Headlines about explosions in Kyiv are likely sending jitters through the markets, while the uncertainty about how the geopolitical risks will feed into monetary policy may also be why this bounce-back could prove to be very short-lived.

Diminishing expectations that the Federal Reserve will raise rates by 50 basis points in March is probably just about the only tailwind for US equities right now as the worst-case scenario in Ukraine materializes. However, FOMC members are clearly split on whether a double rate hike is necessary. Fed Governor Christopher Waller said there was a “strong case” for a half-point increase in overnight remarks, contrasting the somewhat more cautious views of other officials in recent days, including the traditionally hawkish Cleveland Fed head, Loretta Mester.

Hence, the incoming data may yet tilt the balance in favour of the hawks and one such data could be today’s PCE inflation and consumption figures for January.

Investors are also in the dark as to what the European Central Bank will do next as the start of war on the EU’s doorstep may push back calls of a quick exit from stimulus.

Speculation that the ECB may delay normalizing policy because of the Ukraine invasion was one of the reasons why the euro plummeted so much on Thursday. The single currency slumped to a more than 20-month low of $1.1105, and although it has since recovered to around $1.1175, the dollar appears to be catching a bid again along with the Japanese yen.

The dollar index was last trading flat and sterling was unchanged too. The pound also tumbled sharply from the Ukraine driven selloff even though the UK economy is not as exposed to Russia as much as the Eurozone. The growing consensus at the Bank of England for “measured” rate hikes is likely what exacerbated sterling’s slide.

On the other hand, the Australian and New Zealand dollars bounced back more strongly against their US counterpart today, possibly getting a boost from the broad surge in commodity prices, though the loonie was only marginally firmer.

Brent crude was back above $100 a barrel today, having pulled back from yesterday’s eight-year high of $105.79. WTI futures were on the rise again too, while gold reclaimed the $1,900/oz level after swinging wildly on Thursday between $1,974 and $1,878 amid the volatile situation in Ukraine.