Geopolitics Re-enter the Fray.  Yawn?

Today started out as one for the triskadecaphobiacs.  Understandably, after news broke the last night that Israeli warplanes attacked Iranian targets, global equity markets sold off and oil prices spiked.  Since the initial shock, however, some combination of cooler heads and buy-the-dip mentality have taken stocks well off their lows.  Might they be unchanged or higher by the time you read this?

There’s an old saying that “if you’re a hammer, everything looks like a nail.”  At this point it can be adapted to stocks: “if you’re a stock trader, every dip looks like a buying opportunity.”

The trajectory is unmistakable:

S&P 500 Mini (ES) June Futures, 2-Days, 2-Minute Candles

Source: Interactive Brokers

Past performance is not indicative of future results

To be fair, we did receive some truly good news at 10AM EDT.  The preliminary June University of Michigan sentiment report rebounded sharply.  Sentiment soared to 60.5 from 53.6; Current Conditions improved to 63.7 from 59.3; Expectations zoomed to 58.4 from 49.7; and 1-Year Inflation Expectations plunged from 5.1% to 6.4%.  The only reading that failed to show improvement was 5-10 Year Inflation Expectations, which remain unchanged at 4.1%.  But it is important to note that the bounce was well underway even before the positivity from UMich. 

The moves in oil largely mirror those of equities, though the price of West Texas crude oil futures remain about 5% higher than yesterday:

WTI Crude June Futures, 2-Days, 2-Minute Candles

Source: Interactive Brokers

Past performance is not indicative of future results

Also of note, we see bond yields higher by about 6 basis points across the yield curve.  We are clearly lacking a “flight to safety” bid in US Treasuries.  Instead, today’s bump in yields is largely erasing the post-PPI enthusiasm that drove yields lower yesterday.   Rather than seeking a haven in Treasuries, traders are instead pricing in the negative influence that higher energy prices could have upon inflation, and thus reducing their likelihood for rate cuts.  If the uncertain effect of tariffs might be sufficient to keep the Fed on the sidelines for the next few months, a volatile conflict in the Middle East could give the FOMC even greater reason to pause. 

Yet once again, the bump in yields is having little effect upon the overall level of the US dollar.  Key indices like DXY and BBDXY are up only very slightly this morning.  We noted yesterday that while it is understandable to see a weaker dollar when rates fall, it is intriguing to find a weaker dollar on days when yields are rising.  Today we are not seeing dollar weakness, but the very modest strength is hardly commensurate with today’s higher yields.  Our interpretation for that phenomenon is that money continues to leak out of US assets, with yield increases partly caused by foreign holders reducing their US bond holdings.

We have always contended that when push comes to shove, in contrast to commodities and bond investors, equity investors are not particularly concerned with geopolitics. We’re good at assessing how specific events might affect the variables that directly influence stock valuations – revenues, earnings, and cash flows – but far less so when it comes to relatively nebulous events.  A conflict between Israel and Iran could metastasize in all sorts of nasty ways, but quite frankly, the Israeli economy is too small to affect many multinationals’ bottom lines, and Iran has been isolated from the global economy for decades.  So, if a trader has been buying dips in large tech stocks, the early phase of this conflict offers little reason to change that tactic.  That said, just as it wouldn’t surprise me if stocks make an attempt to recoup all their lost ground today, it also wouldn’t surprise me to see if traders are not exactly thrilled with going home long over a potentially contentious weekend.