San Francisco Frontiers - Ukraine fears weigh on markets but 'chance' of deal provides hope

The crisis in Eastern Europe added to long-running unease about the Federal Reserve's plans to hike interest rates as it battles to rein in 40-year-high inflation with one top official saying the bank needed to act quickly to maintain its credibility.

Equities were sent spinning after US national security advisor Jake Sullivan warned last week that Russia could storm into Ukraine "any day now", having amassed more than 100,000 troops on its border in recent weeks.

Western powers have drawn up a series of tough sanctions against Moscow in the event of an invasion but there is a big worry that such a move would have economic consequences owing to the fact that the two countries are key sources of vital commodities including oil, gas and wheat.

The price of each of them has soared in recent weeks.

However, while Washington continues to fret, there was a glimmer of hope that recent diplomatic efforts could pay off, with Russian foreign minister Sergei Lavrov saying there was "always a chance" for agreement with the West.

In a televised meeting, he told President Vladimir Putin that talks with US and European leaders showed enough of an opening for progress on his goals, adding: "I would suggest continuing."

German Chancellor Olaf Scholz was due in Moscow on Tuesday for talks with Putin.

The exchange between Putin and Lavrov improved the mood on markets slightly, helping Wall Street off its intra-day lows, though all three main indexes ended in negative territory for a second day.

Asia also struggled but fared a little better as the day progressed.

Tokyo dipped as investors brushed off data showing Japan's economy rebounded in the final three months of 2021.

Hong Kong, Sydney, Seoul, Wellington and Manila also slipped but Shanghai, Taipei and Jakarta edged up.

Oil prices dipped on the comments, though they remain at more than seven-year highs and within touching distance of $100 a barrel, having soared around 25 percent since the start of January.

The long-running saga over the Fed's plans for fighting inflation were also still on traders' minds, with the central bank expected to hike rates next month but speculation rife over how much it will move and how many more times after.

St Louis Fed President James Bullard said Monday officials needed to be decisive in its actions, telling CNBC "our credibility is on the line here".

He added that the bank should "front load" its actions and raise the benchmark borrowing rate to one percent by July, echoing similar remarks last week that caused a stir on trading floors.

But some commentators warned that with prices being fuelled by factors such as surging energy costs and supply chain problems, the Fed hikes could have little effect.

"What we are seeing is a Fed that is reacting to inflationary prints even though many of the pressures on inflation are factors that the Fed really can't solve," Kristina Hooper, of Invesco, told Bloomberg Television.

"So that certainly increases the risks and reduces the clarity."

Still, with the global economy in recovery mode and most governments easing containment measures, observers remain upbeat about the outlook for markets.

"Times will certainly become somewhat rougher on the markets, as the first weeks of this year have already shown," said DWS chief investment officer Stefan Kreuzkamp.

"However, on a 12-month horizon, we stay with our positive assessment of equities," he added.

- Key figures around 0230 GMT -

Tokyo - Nikkei 225: DOWN 0.3 percent at 27,006.66 (break)

Hong Kong - Hang Seng Index: DOWN 0.1 percent at 24,529.44

Shanghai - Composite: UP 0.4 percent at 3,441.42

West Texas Intermediate: DOWN 0.4 percent at $95.12 per barrel

Brent North Sea crude: DOWN 0.3 percent at $96.22 per barrel

Euro/dollar: UP at $1.1312 from $1.1305 late Monday

Pound/dollar: UP at $1.3538 from $1.3526

Euro/pound: UP at 83.56 pence from 83.54 pence

Dollar/yen: DOWN at 115.43 yen from 115.55 yen

New York - Dow: DOWN 0.5 percent at 34,566.17 (close)

London - FTSE 100: DOWN 1.7 percent at 7,531.59 (close)

T.Martin--SFF