Stocks Appear Stable; Will That Last?

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As I write, early indications are that markets this week are taking a bit of a breather. Dow futures are indicating an opening a couple of hundred points up, with the S&P and Nasdaq looking like it will open a little higher. Lest you think that is reassuring, though, it is probable that the reason for the pause is not stability, but rather the presence of so many potentially destabilizing factors this week that traders aren’t sure yet how to react.

There is still a war raging in Ukraine, with a Russian attack over the weekend so far west that it is raising real concerns about escalation, bringing NATO into the fight and, frankly, about the sanity of Vladimir Putin. There is also talk of another round of negotiations as it looks impossible now for any military result other than a long, drawn-out campaign that costs thousands of lives and billions of dollars on both sides. Add in reports of dissent among the Russian people as they learn from outside sources about the nature of the war, along with pressure from Russia’s billionaires as their assets get frozen around the world -- talks, even for Putin, are beginning to make sense.

The problem, though, is that talks so far have led nowhere and it is hard to see how they can produce any positive outcome at this point. Putin is intent on seizing Ukraine, and the Ukrainians are fighting fiercely for their country. Unless Putin decides to abandon his expansionist ambitions, no amount of talking will solve anything.

Mixed messages and uncertainty are the order of the day when it comes to the war in Ukraine, and there is a similar mood around something that most people had hoped was essentially over: the pandemic. Vaccination rates are now such that in many places, Covid is not really seen as a threat any more, other than to a small minority who have chosen to risk their own lives and those of their loved ones. As a result, restrictions are disappearing in the U.S., Europe, and many other places. That should be good news for the market, but this morning brings a stark reminder not to be complacent.

The Chinese city of Shenzhen, a manufacturing, finance, and technology hub of around 17.5 million people close to the border with Hong Kong, has been locked down due to a Covid outbreak. If the official numbers are to be believed, that lockdown is because of 400 confirmed cases since the end of February. That might not seem like a lot in a city that size, but we don’t yet know if this is a new variant or what has caused the spike, it seems like a sensible precaution. Whether justified or not, though, it will cause massive economic disruption, including Apple supplier Foxconn shutting down operations there, which will only add pressure to an already pressured supply chain.

The third and perhaps most significant area of uncertainty facing traders as this week gets underway if the Fed. The FOMC meeting that begins tomorrow is widely expected to result in a rate hike announced in a statement released on Wednesday. It will be interesting to see what the Fed decides, given the destabilizing impact of the war and the fact that inflation is now unarguably raging. Do they go with the more conservative 0.25% increase, or attack inflation more aggressively with a 0.5% hike? The former now looks far more likely than the latter but even if that is the case, any indication of bigger hikes later this year or a desire for more of them than the market is currently pricing in will produce a big negative reaction in stocks.

So, don’t be fooled. This week may be starting off with slightly positive prints in stock indices and what looks like calm, but it is actually just traders and investors holding their breath in anticipation of what could well be another volatile week in the markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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