By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Markets struck a calmer, and more positive, tone yesterday, amid another deluge of geopolitical headlines. Today, developments in the Middle East will remain in focus, with the data docket light.
WHERE WE STAND – Markets struck a decidedly more positive tone yesterday, though it’s clearly too soon to be sounding the ‘all clear’ just yet.
I’d love to claim that said positive tone was due to me being off desk for the majority of the day, recording a podcast (out Fri!) and enjoying a spot of lunch afterwards, but it was of course geopolitical news flow that remains the main driver of proceedings.
That news flow has leaned net positive over the last day or so, although kinetic action continues in the Middle East, not only with President Trump having touted insurance guarantees, and potential navy escorts for tankers in the Strait of Hormuz, but also amid reporting (which was later denied) that Iran had reached out to the US via various back-channels to engage in discussions regarding an end to the war.
Still, when you add that news flow to a market which had clearly got somewhat over-excitable in terms of the de-risking and de-leveraging that we saw on Tuesday, you have a fairly strong mix to drive a notable reversal across the board. In fact, when sentiment had swung to such a bearish extreme, it doesn’t tend to need an especially notable or concrete catalyst to decisively turn things around.
That’s pretty much exactly what we saw yesterday, with participants reaching for the classic risk-on playbook; stocks gained (with both spoos & the NQ now above Friday’s closing level!), Govvies softened, the dollar rolled over a touch, and crude benchmarks also slipped. That gold and silver gained ground, and considerable ground at that, suggests that metals continue to trade as more of a momentum-driven asset, than anything resembling safe havens, for the time being.
In any case, not that data matters especially much right now, but better-than-expected February ADP employment, and ISM services PMI figures, will certainly not have harmed any of those positive tones.
Of course, the key question now is what happens next. Either, what we saw yesterday proves a ‘flash in the pan’ and we soon switch to a more defensive tone; or, markets consolidate for a time, chopping around current levels; or, more positive tones begin to prevail across the board on a more prolonged and consistent basis.
While I remain bullish risk over the medium-term, I’m not sure markets are quite ready to go ‘all-in’ on the idea of upping risk levels too much just yet, given that a degree of caution will logically still be factoring into participants’ thinking at least until we see some concrete progress towards ‘off ramps’ being taken and/or regain confidence that energy flows through the Strait of Hormuz are returning to something resembling a more normal level. As such, I suppose the base case for now is that we see a period of consolidation, albeit one where my bias remains towards buying equity dips if they occur.
Still, all this does provide another chunk of evidence that, as we’ve seen so often in the last year or so, those who immediately reach for hyperbole, descend into hysteria, and price the worst-case left-tail risk scenario as their base case, often end up with a degree of egg on their faces. To be clear, I am not trivialising the current situation, nor am I saying that any and all risks should be dismissed out of hand. However, just like oil and water, emotions and market views should not mix. There remains a tight correlation between those able to maintain a rational view of proceedings, and those who are able to preserve PnL.
LOOK AHEAD – Scheduled events continue to take a back seat, in the grand scheme of things, and today’s calendar is rather light in any case.
On the data front, we have just January’s eurozone retail sales report, and the weekly US jobless claims figures to digest, though neither of those are likely to move the needle too much. Besides that, a handful of ECB speakers, including President Lagarde, are due to make remarks, while retail earnings from the likes of Kroger and Costco may also attract some attention.
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