IMCV - The Present Explosive Geopolitical Situation Is Impossible To Predict
2023-10-17 02:10:00 ET
Summary
- The current war situation is moving oil, bonds and stocks, as the worst-case scenario is a massive oil price spike, which overrode bottoming action in the stock market.
- A worst-case scenario would be bullish for bonds, no matter what happens to the price of oil, as it will cause a deflationary shock.
- The strong correlation we had for most of September and October - where weak Treasury futures meant weak stock index futures - completely disappeared last Friday.
Just as the stock market was trying to shake off spiking bond yields, Hamas decided to attack Israeli civilians and Israel understandably has retaliated. This situation is moving oil, bonds and stocks, as the worst-case scenario is a massive oil price spike, which overrode bottoming action in the stock market.
If this war remains contained to Gaza and Israel, and if Hezbollah doesn’t attack from Lebanon, and if Israel does not bomb Iranian targets, making this a broad regional conflict - that’s too many ‘ifs’ - then a fourth quarter rally may still be in the cards.
But we went from worrying about bonds to worrying about a war that just 10 days ago no intelligence agency had any idea was coming.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Is it possible that Hamas’s objective from the beginning was to trigger just such a regional war, based on the expected Israeli response? This is my biggest worry, at the moment, as a prolonged war will surely impact global financial markets, starting with a spike in the oil price.
A worst-case scenario would be bullish for bonds, no matter what happens to the price of oil, as it will cause a deflationary shock. I think we saw some of that action last Friday, when the bond market rebounded quite significantly from its Thursday selloff and the stock market sold off notably.
The strong correlation we had for most of September and October - where weak Treasury futures meant weak stock index futures - completely disappeared last Friday.
Some commentators tried to pin the stock market action on weak consumer confidence and higher inflation expectations, based on economic releases that came out at 10am that day.
I don’t believe that for a second. It was the stock market being worried about what might happen over the weekend in this explosive geopolitical situation.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A lot will be decided this week. It will be a big positive if the S&P 500 holds its October lows. It will be an even bigger positive if we make further progress to the upside, but I fear that this will all be contingent on whether or not the Israeli situation escalates past Gaza.
When the stock market bottomed last October and began to rally, it held its key 10- and 20-day moving averages all the way until December. Investors bought stocks on every pullback. After the sharp selloff at the end of last week, the S&P 500 is sitting on those key moving averages - as of this writing (Sunday).
Note: After I wrote this, I saw the U.S. index futures open rather strong on Sunday night with oil and bonds marginally down. It looks like the unwinding of the fear trade from Friday. I think as long as this war lasts, there will be many twists and turns, but avoiding a worst-case scenario can lead to the fourth quarter rally.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
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The Present Explosive Geopolitical Situation Is Impossible To Predict