A fine balance

The Day So Far…

The market appears to be gathering itself after the brief period of risk off trade that materialised at the open of Wall Street yesterday. The combination of tension rising in the Korean peninsula, the political fallout from the Syria air strikes, Trump’s failure on the repeal of Obamacare, and Melenchon rising in the French polls, all came together to create a negative build in sentiment, which when in combination with the lower liquidity heading into the Easter period  saw a concerted move lower in US stocks. The interesting factor here, and a pattern that has been evident in recent sessions, is that more often or not after the European markets close the recovery on Wall Street commences and by the time the closing bell sounds losses are minimal despite the initial nervousness. The fact that this is happening means that any shorting of US equities must be managed actively and over realistic time-frames in order to avoid what can be quite aggressive snap backs in price action. However, one would think that this cannot go on forever. To gauge what could be the catalyst to define a more lasting directional move I believe comes down to two main macro events, this being how much patience the market has in waiting for Trump to deliver on fiscal reforms, and secondly, does the relationship between the US, China and Russia break down. On both accounts, I think the end result will be a positive one in that markets will continue to give Trump time to deliver while the Fed will always lean towards a more cautious approach to raising rates and tightening the balance sheet. Meanwhile, I see the recent escalation in geopolitics as more posturing than anything that could potentially lead to any type of military engagement. As such I don’t see any reason to fear a pending correction in equity markets and although there maybe some nervousness over the health of corporate America, with earnings seasons unofficially kicking off tomorrow, I think the results will have little impact on financial assets given the overriding dominance of broader macro themes discussed above and with the 1st round of the French election due in two weeks time.

The Day Ahead…

The calendar is a little more interesting today with import/export prices coming out at 1.30pm followed by the Bank of Canada rate decision and press conference at 3pm, and regular weekly crude oil inventories at 3.30pm. Despite the more busy schedule overall direction may well be derived from sentiment rather than specific data at this point and although gold has come off overnight highs it is still holding onto a large portion of recent gains which is a reflection of the cautiousness present at the moment. The one asset that has multiple fundamentals supporting its recent rise is crude oil where a combination of Saudi officials hinting at more intervention, a compliance of 104% in agreed production cuts, and with the largest draw down in headline API crude since December 2016, all adds to the greater conviction that further upside in the context of the current geopolitical environment can not be ruled out.