Morgan Stanley’s Sankaran Sees Ukraine-Russia Rally as a ‘Blip’

(Bloomberg) — Morgan Stanley’s Head of U.S. and European Credit Strategy Srikanth Sankaran said a rally in equity and credit markets on optimism about progress in cease-fire talks between Russia and Ukraine is just a temporary blip.

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“The focus will definitely shift back to the central bank hawkishness,” Sankaran said in an interview with Bloomberg TV’s Jonathan Ferro Tuesday. The rally is “likely to fade over the near term,” he said, as the market starts to price in the magnitude of the Federal Reserve’s upcoming rate hikes.

“From the risk-markets perspective, I think that’s where there is still a bit of conundrum to be resolved,” Sankaran said.

A key measure of U.S. corporate credit risk is falling for a second straight day on Tuesday. The spread on the Markit CDX North American Investment Grade Index, which declines as credit risk drops, tightened 3.02 basis points to 67.2 as of 11:15 a.m. New York time. That’s the lowest level since early February when adjusting for the index roll on March 20.

The Markit CDX North American High Yield Index price, which rises as credit risk declines, rose 0.6 points to 105.6.

The first round of face-to-face talks between Russia and Ukraine in more than three weeks failed to reach agreement on a cease-fire, but offered a potential pathway to a meeting between Vladimir Putin and Volodymyr Zelenskiy to resolve the war.

Prior to those developments, credit investors had turned the most negative on junk bonds since 2008 amid growing concern about inflation, geopolitics and the economic outlook, according to a survey by Bank of America Corp.

Read more: Junk Investors Are Most Bearish Since Global Financial Crisis

The leading worry for credit investors is inflation, while most of the 116 investors surveyed said they don’t expect the war in Ukraine to end soon, the survey showed. The third-biggest concern is higher rates, followed by oil prices and recession/deflation.