What Traders Need to Know Amid Geopolitical Tensions, Earnings and Noisy Data

Already worried about the status of the U.S. economy and the stock market, traders are on edge due to the recent escalation of tensions between Israel and Hamas, leading into war. These recent events, the forthcoming earnings season, and the upcoming U.S. inflation figures have left investors uncertain about the future.

Background 

The last three months have been particularly turbulent for the financial markets, and investors and traders are understandably on edge. They were already nervous about increasing U.S. Treasury yields because they expected the Federal Reserve to raise interest rates further since inflation in the United States was still over target. In general, the Fed is less likely to mess with market sentiment if the job market is poor. However, last week's wildly inconsistent labor market statistics left investors befuddled. For instance, the JOLTS job opening data that provides insights into labor market dynamics, including job openings and hires, came with a strong reading of 9.61 million against the forecast of 8.81 million. The number gave a clear indication that the Fed can increase the interest rate without any worry.

But then U.S. ADP data, which focuses on private-sector employment and based on payroll data, came in at 89K (while the forecast was 154K) last Wednesday. Basically, the ADP data made traders think that there is something missing in these numbers, as the JOLTS and ADP numbers were not giving the same message.

Then, on Friday last week, traders were exposed to the U.S. NFP (nonfarm payroll) reading, which came in at 336K, much higher than the forecast of 171K and also the highest reading since June of this year. The U.S. NFP report is a comprehensive government report that covers both private and public-sector employment and is considered a key indicator of the overall health of the labor market. All these reports brought massive volatility to the U.S. Treasury market, which I believe is still going to remain that way.

The most important number, the Consumer Price Index (CPI), will be released on Thursday this week. If the number confirms the trend that we experienced in the past two readings, it is highly likely that the Fed will have to adopt a more hawkish narrative.

Meanwhile, the growing conflict between Israel and Palestine further added to the concerns of investors. The war, publicly declared by the Israeli Prime Minister, has made geopolitical tensions even worse, which is the main source of concern among risk-takers. The United States, together with the United Kingdom, France, Germany, and others, came out strongly in favor of Israel. However, countries like China, Russia, and Saudi Arabia took a very different tack.

The United States and its allies are already funding one war in Ukraine, which has made their conditions unstable to a large extent, and getting engaged in another; if the situation were to escalate further from the current line, it would make things extremely complicated, as neither the United States nor its allies can afford to get involved in a conflict with China or Saudi Arabia. Since the outbreak of this conflict, the oil market has been extraordinarily volatile, and rising oil prices and heightened geopolitical tensions pose a significant threat to the U.S. stock market and global stock market.

Earnings

This week marks the start of the new earnings season, and as the debate about soft vs. hard landings rages on in the background, traders will have their eyes on the earnings figures. Most experts agree that the large increase in interest rates will have a devastating effect on the economies of the United States and the rest of the world. Thus, investors will be focusing not just on the reported profit data but also on the firms' future projections in this area. Keep in mind that this quarter marks the beginning of things that have been discussed and worried about for a while now: a slowdown in global economic growth. Heightened global tensions, higher oil prices, and increasing yields are only the tip of the iceberg.

Market Behavior

The S&P 500 chart from the MT4 trading platform reveals that the U.S. stock market has paid little attention to the rising tensions caused by a war; strong gains were seen in the S&P 500 yesterday, although most of this may be attributed to the index's recent intense selling. In fact, last week was the first time in over five weeks that the index showed weekly improvements.

The 200-day simple moving average is a significant support level, and the daily chart below reveals that traders have begun bargain hunting at and around this level. As the price remains above the 200-day simple moving average, more price increases are probable. However, if this is a dead cat bounce, the market might retest the lows it established in February and could even go further lower.

Chart from AvaTrade

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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