One of one war drums beat: Growing sense of widespread geopolitical unease

Following a brief respite prompted by slightly softer ISM services paid component and balanced remarks from the Fed Chair, U.S. indexes took a nosedive as Brent crude surged past $90 a barrel as the Middle East powder keg threatened to ignite. The escalation in geopolitical tensions was fuelled by Israeli Prime Minister Benjamin Netanyahu's continued war drum-beating rhetoric, intensifying deeper concerns.

To global market investors and anyone seeking peace in the world, Netanyahu has become an intolerable liability, but one that we cannot afford to ignore. Netanyahu is not improving safety but rather endangering it.

Further fanning the geopolitical fires, U.S. Secretary of State Antony Blinken asserted that Ukraine's eventual accession to NATO remains steadfastly supported among member states, much to Putin's chagrin. Undoubtedly, this will result in escalating tensions.

The prospect of more intense war drums beating in Eastern Europe and The Middle East suggests that the world may be edging closer to involving more actors in a global conflict.

Indeed, the world feels markedly less safe today than when we woke up on Monday. Market sentiment seems to reflect a growing sense of widespread geopolitical unease, with stocks tanking, oil prices surging, the yen rallying, and gold in high demand.

Furthermore, the investment world is grappling with statements from central bank officials, notably Federal Reserve Bank Minneapolis President Neel Kashkari's suggestion of a potential scenario where no rate cuts are needed if progress on inflation stalls and the economy maintains its robustness. Indeed, a wider cohort of Wall Street traders are now embracing this view.

As always, the Non-Farm Payrolls (NFP) report will serve as the ultimate determinant in a challenging week for markets. While an in-line NFP print and a neutral Average Hourly Earnings (AHE) reading might not stir significant market movements, a substantial overshoot in one metric without a corresponding undershoot in the other could prompt yet another hawkish reassessment of the likelihood of a June rate cut at the Federal Open Market Committee (FOMC) meeting.

It isn't easy to imagine equities remaining unscathed if this scenario materializes.

According to a Bloomberg survey of economists, robust US employment gains are expected to persist into March, marking the fourth consecutive month of increases. Payrolls are anticipated to rise by at least 200,000, reflecting ongoing strength in the labour market. However, average hourly earnings are projected to show a moderated increase, with a 4.1% climb from the same month last year, marking the smallest annual advance since mid-2021.

Investors have largely overlooked the relatively new ADP pay growth numbers; if the double-digit pay growth for job changers is even remotely trend accurate and gets reflected in the Average Hourly Earnings (AHE) data, particularly with the headline figure coming in at over 200,000, it could spell another challenging day for stocks. Such an outcome might trigger renewed concerns about inflationary pressures and prompt a more thorough reassessment of the Federal Reserve's monetary policy, possibly aligning with Neel Kashkari's suggestion of a no-rate-cut trial balloon.

On the other hand, given the market's heightened sensitivity to inflation data and the Federal Reserve Chair's inclination towards easing monetary policy, any softer-than-expected reading on AHE could be received positively on Wall Street. This is especially true considering that AHE is now the lynchpin in the NFP series, correspondingly influencing market sentiment and expectations regarding future Fed policy decisions.

Let's hope for a peaceful resolution around the world and a gentle arrival of AHE.