Rising geopolitical tensions, Fed hawks take a toll on sentiment

Rising geopolitical tensions between the US versus China and Russia, and the hawkish Federal Reserve (Fed) expectations weighed on market sentiment at the start of the week. The US yields, the US dollar and gold gained, stock indices kicked off the week under selling pressure.  

Fed President Jay Powell wills speak following a blowout jobs report, and US President Joe Biden will deliver his State of the Union speech following the Chinese spy balloon incident.  

Hence, there is little to cheer.

A sour cocktail of tensions and Fed expectations 

Tensions around the Chinese spy balloon that was discovered last week and shut down, didn’t do good to the Chinese stocks trading on American exchanges on risk of escalation. Risk of escalation may include higher tariffs, shortly after news of tariff relief on Chinese goods, and it could lead to a potential revival of the US – China trade war.  

The Chinese Golden Dragon index fell more than 1.80%, but that was also partly due to the overall stock selloff that was triggered by an excessively strong jobs report released on Friday, and that – by its monumental strength – sent the Fed doves flying away, increased the expectation of further rate hikes, dashed the odds of immediate recession, and lowered the probability of seeing a rate cut by the end of this year from the Fed.  

Atlanta Fed President Raphael Bostic even said that the strong jobs report may encourage the Fed to raise the interest rates further above the 5% mark, which would require one more 25bp rate hike, on top of two more already expected. There could even be a 50bp hike on the pipeline, he said. Could there be? It will depend on how the strong jobs impact inflation, and we won’t have an answer before next week.  

What we know this week, is that the Fed hawks are returning to the playground, and the Fed expectations, mixed with escalating geopolitical tensions with China, and also with Russia.  

On the Russian front, the US announced yesterday that it is preparing to tax the Russian aluminum by 200% as soon as this week. I am not sure that extra measures will convince Putin to back off, but it could help further squeeze Russia’s finances. Russia announced its biggest slump in oil and gas revenue in January, since at least 1998, as the revenue plunged by 46% in January. Bloomberg writes that spending due to war increased 59%.  

The aluminum futures traded sharply lower on COMEX yesterday – although some doubt that the announcement may be delayed as a 200% on Russian aluminum would be a big hit to US domestic businesses as Russian is the world’s second biggest aluminum producer.  

Market reaction  

Rising geopolitical tensions, and the Fed hawks feed into higher US yields. The US 2-year yield is above the levels it kicked off the year, the US 10-year yield is following suit, and the dollar is sharply bid this week, the dollar index gained nearly 3% in three sessions, and is now testing the 50-DMA to the upside, and there is little reason to stop the dollar from a further recovery this week.  

Gold is slightly better bid on the mounting geopolitical tensions, but the rising US dollar and the rising yields will likely cap gains into the $1900 per ounce. 

In the currencies markets, the EURUSD tanked to 1.0710 yesterday, and rebounded from the lower band of the latest bullish trend, which is just a couple of pips above the 50-DMA.  

The USDJPY jumped to 132, and challenged its own 50-DMA resistance. The Bank of Japan (BoJ) doves joined the move next to the Fed hawks as the news that Amamiya, a dovish banker, will lead the BoJ after Kuroda’s departure. 

Cable consolidates a touch above the 1.20 mark.  

The Aussie-dollar is better bid today as the Reserve Bank of Australia (RBA) hiked the rates by 25bp points as expected, and said that more rate hikes could be down the road, as inflation remains high and sticky.  

In indices, the S&P500 retreated by 0.60% yesterday, Nasdaq 100 lost 0.87%. Losses could extend toward 4030 for the S&P500 this week, the minor 23.6% retracement on October to last week rally, and toward 12040 for Nasdaq, the major 38.2% retracement on the latest rally, as rate-sensitive tech stocks are expected to be more severely hit than non-tech companies.  

But if we leave the macro news aside for a moment, Google announced its own conversational AI called Bard AI in response to the Microsoft-supported ChatGPT. Microsoft scheduled a mystery event for today, and many people think that we will be hearing more about ChatGPT in that event. Will it help lift the otherwise morose market mood? We will see. Baidu which announced that it will roll out its own AI in March jumped more than 15% in Hong Kong. 

In energy 

In energy and commodity space, the Indian Tata steel announced an unexpected loss last quarter and the shares slipped more than 4%. BP is to announce its earnings shortly. 

Crude oil rebounded past the $75pb, but solid offers are yet to be cleared into the 50-DMA, which stands a touch above the $77pb level.  

The European nat gas futures are slightly higher this week, after falling to pre-war levels.  

A nat gas export terminal in Turkey was hit by a strong earthquake in Turkey on Monday, it should recover in the coming days it is said.  

The Turkish construction stocks rose before the horrified eyes of those who were watching the earthquake news along with the market news, as more than 6000 buildings collapsed, killing thousands.