Will history look back at the past few weeks and remark how could so many miss the current environment? I have often opined the most obvious conclusions are those which are most likely to be ignored. I think I am an optimistic person who never believes something is impossible and ardently believe many are limited by their self- perceived limitations or those limitations imposed by others.
With the above written, there are two events that I think could have great repercussions. The first is the Greek election. Most will argue the ECB was expecting Sunday’s results and is why the ECB adopted its QE policy on steroids. Yesterday’s market reaction to the election was muted if that.
The last two weeks of February can be of significance given the current Greek bailout agreement expires February 28. I cynically ask how many of Tsipras’s campaign promises be broken and how raucous will the upcoming debate become between the ECB and Greece?
The second and perhaps more chronic scenario is oil. There are 12 members of OPEC, an organization that supplies about 56% of America’s oil according to the US Energy Information Agency (EIA).
Of its twelve members, eight are experiencing great civil unrest bordering on anarchy, the largest member is in the middle of regime change, and only three members resembles yesterday’s status quo, two of which are almost insignificant.
And then there is Russia where Russian regulars are now reported to be fighting with Ukrainian separatists, fighting that has caused a dramatic change in NATO’s and European attitudes towards the easing of sanctions. Sunday afternoon it was reported NATO et.al. is considerably hardening its stance.
If I presented today’s environment to CFA or MBA 101 and asked the class how the markets would respond, I am relatively certain most will declare oil prices would rise exponentially.
I think today’s geopolitical/geostrategic uncertainty is the greatest in at least two generations. The influential periodical Foreign Affairs confirms this view writing “the region [Middle East] is more volatile than at any point since the collapse of the Ottoman Empire.” At least during the Cold War, the environment was well defined. The proverbial run rate of foreign policy is historically many years.
Students of the markets know approximately 48% of the S & P 500 revenues and 52% of the S & P 500 profits are derived from global trade. Yes Virginia effective foreign policy does matter.
Enough of the pessimistic diatribe that may make me call my doctor for some SSRI inhibitors, as stated above all markets will relatively quiet yesterday, perhaps the result of the impending snow storm.
Perhaps one comment of significance was from OPEC’s Secretary General. Badri stated “I think prices have reached bottom and should see some rebound very soon.” Badri further remarked oil could go to $200 barrel if there is a real shortage caused by the lack of investment or “supply disruption.”
Today, earning reports accelerate as does economic data. Moreover today is the commencement of a two day FOMC meeting. How will the markets respond?
Last night the foreign markets were down. London was down 0.49%, Paris down 1.30% and Frankfurt down 1.26%. Japan wascup 1.26% and Hang Sang down 0.41%.
The Dow should open moderately lower on earning shortfalls, shortfalls that appear to be the result of currency volatility. If history is of any guide, such shortfalls may continue for the foreseeable future hence suggesting the companies whose primary target market in the US should out perform. The 10-year is up 2/32 to yield 1.82%.
