U.S. equities finished mostly lower in a choppy session amid heightened geopolitical concerns after the U.S. warned that a Russian invasion of Ukraine could be imminent, even as Russian Foreign Minister Lavrov suggested today that diplomacy may still be an option. Meanwhile, elevated expectations of tighter monetary policies globally continued to weigh on sentiment. Treasuries fell to extend the recent spike in yields, particularly on the short end of the curve, and the U.S. dollar gained ground, while crude oil prices were higher, and gold rallied. The economic calendar was dormant, and the earnings front was relatively quiet, with shares of Splunk rising amid reports that Dow member Cisco Systems made a takeover offer for the data analytics software company, and Dow component 3M Company warned of headwinds to organic growth. Markets in Europe and Asia finished lower.

The Dow Jones Industrial Average lost 172 points (0.5%) to 34,566, the S&P 500 Index decreased 17 points (0.4%) to 4,402, and the Nasdaq Composite was nearly unchanged at 13,791. In heavy volume, 4.5 billion shares of NYSE-listed stocks were traded, and 4.2 billion shares changed hands on the Nasdaq. WTI crude oil jumped $2.36 to $95.46 per barrel. Elsewhere, the gold spot price traded $31.80 higher to $1,873.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.3% at 96.35.

Splunk Inc. (SPLK $125) gained ground following a report from the Wall Street Journal that Dow member Cisco Systems Inc. (CSCO $53) made a takeover offer for the data analytics software company in excess of $20.0 billion. Neither company has commented on the report. CSCO traded lower.

Dow component 3M Company (MMM $158) issued 2022 guidance at its investor day, where it forecasted earnings-per-share (EPS) of $10.15-10.65, versus the FactSet expectation of $10.38. The company also projected organic—excluding acquisitions, divestitures, and foreign exchange—sales growth of 2-5%. MMM warned that it anticipates a decline in COVID-19-related disposable respirator demand in 2022, resulting in a headwind to organic growth of 2 percentage points and EPS of $0.45. Shares were lower.

As Q4 earnings season is set to roll on this week, of the 359 companies that have reported results in the S&P 500, 68.72% have topped revenue forecasts, while 76.82% have bested earnings expectations, per data compiled by Bloomberg. Compared to last year, revenue growth is on pace to be up nearly 16.35% and earnings expansion is on track for about 27.15%.

The markets have seen some wild swings as the markets grapple with the Fed tightening uncertainty and still solid absolute earnings growth during the quarter but some relative deterioration compared to the previous four quarters. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Smoke on the Water … Fire Down Below, how results have bucked the trends of the past six quarters—with a lower percentage by which companies have been exceeding consensus estimates. As for Fed policy, Liz Ann adds that as has nearly always been the case historically, a shift in the monetary policy backdrop can mark significant turning points in the equity market and typically lead to more frequent bouts of volatility. Liz Ann also notes how the much stronger-than-expected January nonfarm payroll report likely confirmed the Fed's full-steam ahead message for the near term in her latest commentary, Surprise, Surprise: Jobs Surged.

With the markets volatile, find all our market commentary on our Market Insights page, including our article, Market Volatility: Schwab's Quick Take, and follow us on Twitter at @SchwabResearch.

Bond yields continue to rise, inflation comes into focus tomorrow 

The markets continue to grapple with expectations that the Fed will tighten monetary policy aggressively to combat persistent inflation pressures while contemplating what the implications could be for the economy. Treasury yields have moved higher, with the short end of the curve decisively outpacing moves on the mid and longer ends.

Schwab's Chief Fixed Income Strategist, Kathy Jones points out in her latest article, Bond Market: Waiting for Liftoff, that we expect turbulence to continue as Fed Chair Powell indicated that policy plans are not on a set course, with the Fed preferring to take a "nimble" approach. However, she adds that the markets have discounted a significant tightening in policy for this year, with the telltale signs of tight policy expectations already showing up in the markets. Kathy discusses how the yield curve has flattened, with short-term rates moving up sharply relative to long-term rates.

Kathy says while it's clear that the Fed is anxious to initiate a new tightening cycle, we think it's premature to forecast such a rapid pace of rate hikes without more clarity about its plans to reduce the amount of bonds the Fed holds on its balance sheet. The Fed released general principles for quantitative tightening but hasn't spelled out a clear plan yet. She notes how allowing bonds to mature without reinvestment can have a similar impact as hiking rates in terms of the impact on the availability of funds to the banking system. She adds that the Fed has indicated it prefers using the federal funds rate as its primary tool to set policy, but given the size of its current bond holdings, it's possible that quantitative tightening will play a bigger role in the Fed's plans in this cycle than it did in the last cycle.

Treasuries added to last week's drop, as the yield on the 2-year note rose 7 basis points (bps) to 1.59%, while the yields on the 10-year note and the 30-year bond increased 5 bps to 2.00% and 2.30%, respectively.

Tomorrow, the economic calendar will bring the Producer Price Index (PPI), forecasted to show prices at the wholesale level increased 0.5% month-over-month (m/m) during January, while the core rate, which excludes food and energy, is expected to have also advanced 0.5% m/m. The Empire Manufacturing Index for this month is also on deck, projected to have moved back into expansionary territory (a reading above zero) to a level of 12.0 from January's surprising -0.7 reading.

Europe and Asia lower amid geopolitical concerns and monetary policy focus

European equities finished broadly lower with the global markets remaining skittish regarding the prospect of tighter monetary policies on both sides of the pond. The expectations were amplified by last week's key January inflation report out of the U.S., which showed pricing pressures on the consumer side surprisingly accelerated m/m, along with some hawkish commentary from a Fed official. The markets have already been choppy after the Bank of England (BoE) increased rates for a second straight meeting last week, and the European Central Bank (ECB) sounded a more hawkish tone following last week's meeting, and ECB President Christine Lagarde pledged on Monday for a gradual adjustment to monetary policy. Geopolitical tensions between Russia and Ukraine remained in focus with the U.S. warning on Friday that a Russian invasion could be imminent, while Russia's Foreign Minister Lavrov suggested today that diplomacy is still on the table. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, provides his Guide to Geopolitical Risk: Russia-Ukraine, where he discusses how markets have historically shrugged off geopolitical events involving Russia. He notes that Russia makes up a very small portion of the main global and emerging market indexes, while Ukraine has no exposure in such indexes. He discusses the most likely sanctions that may occur if the situation escalates, but he doesn't believe that diversified investors need to take action to protect their portfolios from the risks related to an invasion of Ukraine. The British pound and the euro declined versus the U.S. dollar, while bond yields in the U.K. rose and rates in the Eurozone were mostly lower.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index were down 1.7%, France's CAC-40 Index fell 2.3%, Germany's DAX Index and Italy's FTSE MIB Index declined 2.0%, and Spain's IBEX 35 Index dropped 2.6%.

Stocks in Asia finished broadly lower as the markets continue to be skittish regarding the prospect of tighter monetary policy globally, along with ramped-up geopolitical concerns as Russia and Ukraine tensions remain heightened. Last week's hotter-than-expected read on January consumer price inflation and comments from a U.S. central bank official exacerbated the monetary policy concerns. The markets were already bracing for tighter global monetary policies as the Fed is set to begin hiking rates next month, while the Bank of England has already hiked rates at its last two meetings, and the European Central Bank has hinted it may increase rates later this year. Meanwhile, the People's Bank of China has bucked the trend and moved towards looser monetary policy, while the Bank of Japan announced yesterday that it will buy its benchmark 10-year bonds for the first time since July 2018 in an attempt to keep rates from breaching its target range. Schwab's Jeffrey Kleintop, discusses in his article, What Do Rising Rates Mean for Stock Investors?, how recently, U.S. Treasury bond yields climbed back to their pre-pandemic levels and in Europe, German 10-year yields climbed above 0%, touching their highest level since May 2019. Jeff asks the question of what are the implications of rising global yields for stock prices? He points out that increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.

In economic news, India's wholesale price inflation slowed but at a pace that was higher than expected, while the country reported that its consumer prices accelerated slightly more than expected for January just after the markets closed. Japan's Nikkei 225 Index fell 2.2%, in a return to action following Friday's holiday break, with the yen moving to the upside. China's Shanghai Composite Index declined 1.0%, and the Hong Kong Hang Seng Index decreased 1.4%. Elsewhere, South Korea's Kospi Index dropped 1.6%, and India's S&P BSE Sensex 30 Index tumbled 3.0%, though Australia's S&P/ASX 200 Index moved 0.4% to the upside.

The international economic calendar for tomorrow will be fairly robust, with reports slated for release to include GDP and industrial production from Japan, trade data from South Korea, employment figures from out of the U.K., Spanish CPI, the ZEW Economic Sentiment Survey from Germany, as well as GDP and employment data from the Eurozone.