No Major Earthquakes, Literally or Figuratively, Yet: The Action For April 19, 2024
The news media diverged remarkably overnight in its coverage of the Israeli strike on Iran, with this morning’s front page of the Times giving it no mention, reflecting the uncertainty of newsflow. Nothing more viscerally elucidates the uncertainty of the geopolitical horrowshow that the divergence between The Times and CNN, which cautioned around 10pm last night that there were reports of possible earthquakes following the strikes. The markets reacted with breathtaking celerity on that news, falling nearly 2% in the futures markets and more across Asian equities. Yet this morning the bulls are trying to take control, as their cynical take on the economy and geopolitical context has yet to evaporate during this mild correction. I see the bull’s efforts failing today as investors are not only opening up to the bearish context of world events but the possibility that earnings reports next week will fail to justify valuations, and set the market up for an eventual retest of last October’s lows.
The market is flat this morning but the bears could take control by the close 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.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
Liquidity Metrics: Due in part to tax payments in the USA, measures of money flow across the globe are trending downwards lately, which hurts equities.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that could flip the markets around, if no further geopolitical events cloud the picture including:
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
My current positions include 3M (MMM), Pfizer (PFE), and a moderate position in SPXU, which nets out to a modest short position in equities.