Geopolitical Developments: Germany Is Once Again Scaring Global Investors

This week showed that geopolitics has 3 profound tentacles into financial markets, all of which are negative and may be influencing global investors to turn bearish this Friday. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. Oil's chart is signifying global growth and inflation expectations are stabilizing based on measures of Treasuries and TIPS, even as the US yield curve is rising back to earlier summer levels. Taking financial and geopolitical trends together. expect the S&P 500 to be range-bound over the next few days.

Geopolitics are changing daily but this weekend features a potentially profound development: the German election will determine if Europe heads to political extremes. While the German Greens had been strong this summer and the Social Democrats look poised to win a plurality, a strong showing by the hitherto moribund conservative parties (CDU and CSU) would signal that Germans are not polarized but instead wary of change, and thus warn off voters in countries like France to stay clear of extreme right wing and left wing movements. But the polls suggest a leftist tilt and should that happen the far right in France will be energized. Impacting the well-educated and relatively worldly German voter are a host of global issues coming to fruition this week: Emerging Market currencies hitting new lows, new Asian security pacts and military strategies, China’s Communist Party (CCP) micromanaging companies, industries and the various currency markets, America executing on its remarkable ability to chasten China’s private sector nearly as intensely as the CCP, President Biden repeating the Obama tendency to apologize to foreign leaders, and finally rising interest rates from a Federal Reserve bent on going where central bank has gone before in the quest for social responsibility. Should the German voter signal a changing of the guard it would signal to investors that all is not well, and fears of $US strength, stagflation, Chinese aggression towards its own crown jewels and irrational policies across the developing world, would surface to drag this market to new lows.

My current market positions are in Activision (ATVI), Amgen (AMGN), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).