Biden’s Risk-Taking Helps Power Risk-Aversion Across Global Markets: The Action For October 17, 2023
As President Biden confronts multiple issues with the singular action of visiting Israel in its time of need the effect on investor confidence is ironically negative, as fears of a wider war dovetail with the higher for longer fear about both rates and oil and the dollar. The Times tries to cover all angles this morning on its front page but the sum of the parts points to more risk rather than resilience. Even if Israel destroys the tunnels that sustain Hamas and its war-making ability the open question of how they treat Iran and Lebanon remains, with clear implication for oil and gasoline prices and their negative effect on the American consumer of last resort. This risk outweighs positive earnings reports today and the S&P 500 likely falls over the near term, as we head into a retest of the earlier lows in this long Autumnal correction.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Gold Prices: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
While the bulls can point to just one factor from the action yesterday and overnight that lines up in their favor, it happens to be among the most important for gauging short-term movements:
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.