Two Stories Investors Should Watch Closely This Week

Wall Street Bull statue in Manhattan
Credit: Carlo Allegri / Reuters -

We are in the midst of earnings season, with results hitting the wire thick and fast. Understandably, most traders and investors are focused on that, and with Tesla (TSLA) reporting after the bell today and Apple (AAPL), Microsoft (MSFT), and Google parent Alphabet (GOOG:GOOGL) weighing in tomorrow afternoon, this week is set to be one of the most significant so far, at least for big tech. Despite that inevitable focus on the here and now, however, investors should not lose sight of longer-term influences, and there are two stories that will develop this week worth paying particular attention.

The first, and most obvious, is the Fed meeting that will take place starting tomorrow. The consistent monetary stimulus provided by the Fed in the form of bond buying and low rates is arguably the most important factor in the strength of the stock market right now. There are plenty of reasons to worry, with the Delta variant of Covid restarting talk of restrictions in many countries and inflation gaining ground due to what look like persistent supply issues. Even a previously bullish Wall Street is beginning to downgrade its enthusiasm as a result, with both Citi (C) and Goldman Sachs (GS) releasing somewhat cautionary research notes recently.

And yet the S&P 500 closed at yet another record high on Friday.

S&P 500 chart

Last week’s price action clearly showed that any selling right now, even for good reason, hits a wall of buyers before too long. That is no surprise when the 10-Year and 30-Year Treasuries are yielding 1.25% and 1.9%, respectively, and the Fed is handing out $120 billion a month in investable cash that will inevitably seek a return.

This week’s meeting, however, could mark the beginning of the end for both ultra-low interest rates and massive bond purchases.

The subject of tapering, beginning to reduce that $120 billion figure, has been openly discussed over the last couple of weeks in what looks like a classic Fed “softening up” campaign, where hints are dropped early so as to not startle the market when changes are forthcoming. That is doubly important because they have made it clear that they won’t think about any rate increase until those bond purchases are over, so starting to taper would also give clarity to the proposed timetable for a hike.

I’m not saying that there will be a big announcement this week, but just a formal discussion of tapering and a clearer statement of intent than previously given could easily be enough to spook a market that has become accustomed to current conditions. That is especially true if there is some other perceived reason to sell, and that may come from the second story to watch, deteriorating U.S./China relationship, combined with the Chinese Communist Party’s recent clampdowns on companies there.

The current target of the government’s ire is for profit education companies, but we have also recently seen increased regulation of big tech firms, particularly those with financial arms. It could be that this is all about power, or it could be a roundabout way of putting the brakes on what was a booming Chinese market. It is always hard to know with China, but whatever the motivation, it is putting pressure on Asian markets overall and, in the modern interconnected world, that could easily spread to the U.S. and Europe.

The rapid deterioration in relationships between the U.S. and China could also provide a spark for some selling. Some had hoped that the change in Presidential administrations would prompt better relations with Beijing, but it seems that China would rather deal with tariffs than with criticism of its human rights record. A meeting this week to foster better relations after a breakdown three months ago now looks doomed early, after reports that Chinese Vice Foreign Minister Xie Feng accused the U.S, of demonizing China in an orchestrated campaign. That, coupled with the less free-market-friendly approach of China over the last few weeks points to potential trouble that could disrupt markets here.

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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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