awash in geopolitical risk – global equity markets continue rotation lower

While US investors try in vain to focus their collective attention on Q1 earnings season and US economic data, headlines from around the globe fuel apprehension and fear. There seems nary a corner of the map that is not engulfed in turmoil or under the threat of it. From Syria to Afghanistan, from French Presidential elections to the Turkish referendum, from the Korean peninsula to trade with China, from the proposed US border wall to the refugee crisis in Europe. I cannot seem to remember there being so many variables of significance in the risk management landscape globally or such societal unease domestically.

The result of all of these variables has been continued weakness in equities, both domestically and globally, in recent weeks. As if to underscore that theme of risk aversion, measures of the risk trade have reversed higher in recent weeks. The long dormant volatility index (VIX) has quietly moved 41% higher over the past month. Gold has also caught a bid, rallying over 5% in the period. Even crude oil has been the beneficiary of a reversal of fortunes WTI crude rallying 12.01% from its intra-month low of $47.34/bbl to $53.03/bbl last week. However, most importantly, US Treasury yields have come under pressure despite every indication that the FOMC is looking to further tighten in coming quarters.

Consider that the 10-year yield has dropped from 2.510% to 2.2320% in one month (-11.07%). Incredibly, the FOMC has raised the overnight rate twice since the November elections, December and March, and the 10-year yield is at its lowest point since the week after the ’16 elections. The Fed is raising and forecasting more of the same while investors are increasingly allocating funds to the security of US Treasuries – future interest rate hikes be damned.

That is telling you something that the other gauges of risk are only hinting at. The world is worried. So worried in fact that even the results of the first quarter corporate results under President Trump are playing second fiddle.

With that dire backdrop to consider, investors will have a relatively light economic calendar this week. On Monday and Tuesday the focus will be on housing (Housing Market Index and Housing Starts). On Tuesday we also receive Industrial Production data for March (c. 0.4%). Wednesday’s focus will be the EIA Petroleum Status Report and the Fed’s Beige Book. Rounding out light week are Weekly Jobless Claims, the Philly Fed Business Outlook and Leading Economic indicators (c.02%).

Q1 corporate results pick up some steam this week with Dow components American Express (AXP), Johnson & Johnson (JNJ), IBM (IBM) General Electric (GE) and Goldman Sachs (GS) all reporting. Netflix (NFLX) and Qualcomm (QCOM) will also report this week with large cap tech investors particularly wary given the fact that many of the FANG stocks and many closely correlated names have be been struggling to maintain momentum in recent weeks.

If last week was any indication of what to expect this week, earnings and economic data will matter but geopolitical concerns will likely drive direction.

Flickr photo by: Thomas Hawk @thomashawk