Wall Street refocuses on risk as stocks dip, oil prices climb

By Lawrence Delevingne

BOSTON (Reuters) -U.S. stocks on Monday gave back some of the previous week's gains and oil prices climbed as the conflict in Ukraine continued.

The Dow Jones Industrial Average fell 197.09 points, or 0.57%, to 34,557.84, the S&P 500 lost 17.31 points, or 0.39%, to 4,445.81 and the Nasdaq Composite dropped 160.70 points, or 1.16%, to 13,733.14.

Boeing shares fell more than 5.5% on Monday morning after a 737 jet crashed in China.

Most stock markets rallied last week in anticipation of an eventual peace deal on Ukraine, but it will likely take actual progress to justify further gains.

Turkey's foreign minister said on Sunday that Russia and Ukraine were nearing agreement on "critical" issues and he was hopeful for a ceasefire if the two sides did not backtrack from progress achieved so far.

On Monday, Ukraine defied a Russian ultimatum that its forces laid down arms before dawn in Mariupol, while the European Union was set to consider a possible energy embargo against Russia.

"The coming days will be a litmus test on whether last week's risk-on rally was overdone. Hopes related to a peaceful resolution in Ukraine have relied on headlines more than evidence," said ING's Francesco Pesole and Chris Turner.

The MSCI world equity index was down 0.41% as of 10:30 a.m. ET (1430 GMT). European shares were choppy with the pan-regional STOXX 600 benchmark down 0.01%.

BofA's global fund manager survey last week had a bearish bias with cash levels the highest since April 2020 and global growth expectations the lowest since the financial crisis of 2008. Long oil and commodities were the most crowded trade, and vulnerable to a pullback.

The war in Ukraine, surging commodity prices, supply chain issues and policy tightening have all made investors less upbeat about the prospects for global earnings growth.

Bond investors were braced for more hawkish language from the U.S. Federal Reserve with Chair Jerome Powell speaking on Monday and other Fed members through the week.

Policymakers have flagged a string of rate rises ahead to take the funds rate to anywhere from 1.75% to 3.0% by the end of the year. The market implies a 50-50 chance of a half point hike in May and an even greater chance by June.

Atlanta Federal Reserve Bank President Raphael Bostic said on Monday he had pencilled in a total of eight interest rate hikes for this year and the next, fewer than most of his colleagues as he worries about the effects of Russia's invasion of Ukraine on the U.S. economy.

CURVES FLATTENED

Bond investors seem aware of the risks to growth given the marked flattening of the U.S. Treasury yield curve of recent weeks. The spread between two- and 10-year yields shrunk on Monday to as low as 11.37 basis points, the smallest since the start of the pandemic in March 2020.

The dollar index steadied at 98.30, off its recent peak hit earlier in March at 99.415. The euro fell 0.13% to $1.1035, after surging 1.3% last week.

In commodity markets, gold has failed to get much of a lift from safe-haven flows or inflation concerns, losing more than 3% last week. It was last up 0.8% on Monday at $1,936 an ounce . [GOL/]

Oil prices pushed higher on Monday, after losing ground last week, as there was no easy replacement for Russian barrels in a tight market.

Brent rose 6% to $114.40, while U.S. crude rose 5.5% to $110.5 a barrel as European Union countries considered joining the United States in a Russian oil embargo, while a weekend attack on Saudi oil facilities caused jitters. [O/R]

(Reporting by Lawrence Delevingne in Boston, Danilo Masoni in Milan and Wayne Cole in Sydney; Editing by Bernadette Baum)