Geopolitics: The Impact of Biden’s Competition Order, China’s Floods and Iraq’s Supplication at the White House
Geopolitical developments aren’t derailing American financial markets. The volatility risk premium points to a higher US equity market over the next few days, though volume will be low as the VRP is in a position to reverse itself and catch investors off guard. Helping sentiment in US stocks are commodity moves in copper and oil, low real yields and stable inflation expectations ~ 2% implicit in the US yield curve; but limiting the upside in equities is $US strength against both Major and EM currencies. Expect the market to rise just moderately over the next few days.
Geopolitical developments are providing bricks for the wall of worry the US equity market is climbing, since they amount to minor threats to US interests and significantly detract from the attraction of foreign equities (when compared with owning US equities). Powered by easy liquidity & strong readings in traditional socioeconomic metrics that distill into investor confidence, the US equity market is simply digesting developments like the ones explained below:
1) President Biden’s just announced competition policy is important to businesses and will cause a small dip in confidence as politicization of regulations increases, leading to future equity market corrections driven by surprise headlines. Regulatory Review notes Biden’s competition executive order addresses both conservative and liberal concerns with large firms, likely giving it staying power no matter who wins in midterms and the next Presidential election. Stopping M&A will be easier since “…there are certain types of mergers that antitrust reviews are not going after because our current merger guidelines don’t cover them, particularly mergers that are intended to eliminate competitors—for example, Facebook buying Instagram—or that entail other anticompetitive practices that are not collusive...” Further, they note businesses will have greater costs of compliance, since “,,,the marginal benefit of adding more enforcement in an area where you are doing zero or close to zero is likely to be very high, no matter what the budget constraints are...” One area which may get support from conservative “federalists” concerns the executive order that “directs the FTC to do away with certain occupational licensing requirements that unduly prevent workers from pursuing new opportunities. Occupational licensing, however, has traditionally been a state prerogative.”
2) The market impact from the suffering due to China’s floods is a boost for both inflation hawks and growth pessimists, detracting modestly from confidence and equity momentum and limiting the upside as the S&P 500 rests near all-time highs. Foreign Policy notes “Henan is home to large numbers of factories, and...consumers can expect several disruptions to global supply chains already rattled by the coronavirus pandemic. Apple and Nissan factories are among those wrecked by the flooding.”
3) The limited confidence western leaders have in Iraqi PM Kadhimi is bullish for oil, and a tiny net positive for US equity markets (via the positive effect on stocks like Exxon). S&P notes Kadhimi is visiting Biden ostensibly to end the combat mission (a somewhat misleading issue due to army staff being reclassified into trainers) but also to get support for energy projects which are lagging as western firms want to pull out of Iraq and thus reduce its production capacity.
My current positions in the market are long holdings in Fiserv (FISV), Korn Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN); and a nearly hedged position (net long) in the SPX (UPRO and SPXU).