Week Ahead: Scalia, Oil, and Draghi To Impact Market Movements
Yesterday was what I have come to know since moving to the U.S. as a “half holiday.” Markets, banks, and government offices were closed for Presidents’ Day, but my kids still went to school and most businesses were operating in a normal manner. While we all love days off, I am sure that many market watchers found it a little frustrating to be standing by watching yesterday as several major news stories unfolded, all of which would have offered great trading opportunities in an open market. I know I did. Three of these stories, however, could have lasting effects and should be watched closely this week.
First and foremost, in a market still hopelessly addicted to Central Bank action, we had the latest words of Mario Draghi, the ECB President. European markets received his reassurances well after a period of instability, particularly in the financial sector. It would be easy to dismiss the latest talk as just more of the same, but the market seems to think that Mr. Draghi will have learned from the last quarter of last year that if you are going to talk the talk when it comes to even more accommodative policy, you had better walk the walk. If that opinion is shared by U.S. traders and investors then we should see a strong week for equities in general, and financials in particular.
Based on recent action though, even if the market believes Draghi this time, stocks will still struggle unless oil shows real signs of recovery. There was news on that front over the weekend too as it was revealed that Russia was meeting with some OPEC members to discuss the possibility of moving to restrict production. Significantly in the eyes of many, it later became known that Saudi Arabia was a part of those talks. That gave a big initial boost to oil, which caused WTI to bounce to $31.50 last night.
That may seem like good news but in many ways like the ECB news, it is nothing new. It is no secret that some OPEC members favor a production cut, or at least a freeze, nor is it a surprise that the Saudis will talk to them. That doesn’t mean, however, that they will actually freeze or cut production. The Saudi’s focus is on their ongoing proxy war with Iran and their biggest concern is still to keep pumping to leave little room for Iranian oil to gain a foothold in global markets.
Based on oil’s retracement in early U.S. trading this morning, it looks as if the market views talk as cheap and the likelihood of any real agreement as slim. That said, though, if there is any hint that some consensus could be achieved oil would surge and likely give a boost to stocks.
Both of those things could easily prove to be positives for the stock market this week, but the other news from the holiday weekend could, from a longer term perspective, prove to be a drag on U.S. markets. The passing of Supreme Court Justice Antonin Scalia may not appear on the surface as relevant to stock prices, but the fight regarding nominating a replacement could.
Regardless of whether you think President Obama should nominate a successor in an election year or not, it is clear that he intends to, and equally clear that the Republican run congress intends to block an appointment. The fight that will undoubtedly come and will once again, in an election year, highlight the dysfunction in American politics in the eyes of international investors. It is a cliché that markets hate uncertainty and another display of intransigence from both major U.S. political parties will cause just that.
All in all, then, with two potential short term bullish influences and one longer term downer this could be a week of recovery for stocks. Whether that turns out to be the case or not, though, one thing is for sure. It will be even more important than usual for traders and investors to keep a close eye on the news wires over the next few days.