U.S. indices managed to cut their losses on Tuesday, but the drop was still deep enough to push the S&P 500 into correction territory for the first time since Mar. 2020's COVID-related selloff. The key index fell 1% during the session, resulting in a 10.6% decline since peaking at 4,818 on Jan. 4. While commodity prices remain elevated, the S&P 500 could climb back out of the hole today, with futures contracts tied to the index pointing a 1% gain ahead of the open. Meanwhile, the Dow and Nasdaq climbed 0.8% and 1.4%, respectively.

Bigger picture: Current market fears are centered around sanctions, though the first wave of them appeared to be quite targeted and not that economically damaging. Measures from the U.S. were leveled against two of Russia's largest financial institutions, three members of Russia's elite, as well as sovereign debt, but left the crucial energy sector untouched. Moscow has also taken steps to insulate its economy since the annexation of the Crimean Peninsula in 2014, trimming its budget, broadening its trade portfolio, diversifying away from U.S. Treasuries and dollars, and bolstering hard currency reserves.

"The market sees the various sanctions as modest and perhaps not as aggressive as feared," said Chris Weston, head of research at brokerage Pepperstone. "For now, one could assess there is a vibe across markets that Russian troops will hold Donbass, but push no further."

Central bank policy: Besides escalating tensions between Moscow and Kyiv, Wall Street is also dealing with a surge in inflation and quantitative tightening. Investors have been trying to size up the Fed's path forward in recent months and some economists are warning that inflation could even top 10% should Russian actions result in an energy supply shock. Bets on aggressive rate hikes are moving up again in response, with swaps traders now pricing in a better than 35% chance of a half-point move in March, up from under 15% earlier this week. Fed Governor Michelle Bowman has also suggested a 50 bps increase could be in the cards if the next inflation readings come in too high.