One risk ebbs, another rises…
The market is now conditioned to this war happening in the background but escalation to a direct conflict between the nuclear powers will put a dent into risk sentiment.
With Iran refusing to retaliate against Israel’s attack on Friday, and with Israel now celebrating the Jewish festival of Passover for a week, the geopolitical risk of further escalation in the Middle East is reduced for now. However, the US House of Representatives approving a $61 billion foreign aid package for Ukraine is increasing the risk of further escalation in that part of the world.
The bill now goes to the Senate which the Democratic Party controls with a majority and it is likely to be passed. With that, President Biden will likely sign it into law later this week. Russia has already voiced its displeasure with its Foreign Minister warning that the world is on the brink of a “direct military clash” between the nuclear powers.
The Ukraine-Russia conflict was supposedly going to be a short war and that was in Feb 2022. More than 2 years later, the war is still on-going with no end in sight. The market is now conditioned to this war happening in the background but escalation to a direct conflict between the nuclear powers will put a dent into risk sentiment.
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Day Ahead
Earnings: General Motors (GM), Lockheed Martin (LMT), Tesla (TSLA), Visa (V)
Trading Plan
1. Currencies:
Neutral
2. Commodities:
Uranium & Energy - Stay invested for now.
3. Stocks:
US Stock Index: The US stock market traded higher ahead of major earnings this week. The S&P 500 and the Nasdaq both snapped its 6-day losing streak. Iran’s refusal to respond to Israel’s retaliation also added to the improvement in risk sentiment.
(For more timely info on our Trading plan, click HERE)
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The situation in the Middle East remains uncertain. Escalation will weaken risk sentiment further. Comments from Fed officials about their views on the possibility of interest rate cuts in the months ahead could influence risk sentiment.
What Happened Yesterday
The US Treasury Yield curve inversion remained at 0.35% as the US 2-year bond yield and the 10-year yield remained unchanged.
Israel-Iran Conflict: Iranian Foreign Minister Hossein Amirabdollahian told NBC News the country does not plan to respond to Israel’s retaliatory strike launched Friday. That is a good development as this reduces the risk of further escalation. The Jewish festival of Passover is currently being celebrated in Israel, and it ends after nightfall on 29 April (Passover is celebrated for 7 days in Israel, and 8 days outside of Israel). As such, the risk of Israel launching further attacks during this period is much lower.
As there was no further escalation of the conflict over the weekend, the US stock futures drifted higher through the Asian and London trading hours yesterday with the S&P 500 up +0.32% when the New York session began.
The US stock market opened higher from Friday. It then traded higher through the New York session due to the improvement in risk sentiment. The S&P 500 finished +0.87% higher (high: +1.44%, low: +0.04%), the Dow Jones gained +0.67% (high: +1.21%, low: +0.00%) while the Nasdaq rose +1.02% (high: +1.57%, low: -0.16%).
Gold and silver both saw a -2.71% and -5.20% decline as risk sentiment improved drastically yesterday due to easing of geopolitical tensions.
The crypto market rose higher on the day due to broad based risk taking, Bitcoin is up +2.8% while Ether is up +1.7%.
Headlines & Market Impact
Japan will work with counterparts on excessive FX moves, says finance minister
Notable Snippet: Japanese authorities will work closely with overseas counterparts to deal with excessive volatility in the foreign exchange market, Finance Minister Shunichi Suzuki said on Tuesday.
"We are watching market moves with a high sense of urgency," Suzuki told a regular post-cabinet meeting news conference, adding that Tokyo authorities were ready to take action "without ruling out any options" against excessive currency moves.
The comments came after the dollar rose to 154.85 yen , its strongest levels against the Japanese currency since 1990, keeping markets on heightened alert for any signs of intervention from Tokyo to prop up the yen.
Last week, finance leaders from the United States, Japan and South Korea agreed to "consult closely" on foreign exchange markets in their first trilateral finance dialogue, acknowledging concerns from Tokyo and Seoul over their currencies' recent sharp declines.
At Tuesday's press conference, Suzuki repeated his recent warnings to speculators, saying the government is ready to respond appropriately to excessive exchange moves.
The latest decline in the yen comes after a string of strong U.S. economic data, particularly on inflation, which pushed the dollar to five-month highs and reinforced expectations that the Federal Reserve is unlikely to be in a rush to cut interest rates this year.
Markets are also on the lookout for clues on how the yen's weakness would affect the timing of the next rate hike by the Bank of Japan, after BOJ Governor Kazuo Ueda last week signalled the central bank's readiness to tighten policy if the weak yen's boost to inflation becomes hard to ignore.
What we think: The BoJ and Japanese policymakers continue to telegraph their intentions with regards to currency intervention and monetary policy action. If inflation and yen weakness continue to persist, they will be more vocal about their actions.
Russia warns the world is on the brink of a ‘direct military clash’ between nuclear powers
Notable Snippet: Russia warned Monday that the risk of a “direct military clash” between Russia and nuclear powers in the West is rising.
“Westerners are dangerously balancing on the brink of a direct military clash between nuclear powers, which is fraught with catastrophic consequences,” Russian Foreign Minister Sergey Lavrov said in a video message to the participants of the Moscow Nonproliferation Conference.
The comments come after Russia reacted angrily to the U.S. House of Representatives passing a $61 billion foreign aid package for Kyiv at the weekend.
House lawmakers approved the aid Saturday despite long-standing objections from hardline Republicans; the bill now passes to the Democratic-majority Senate, which is expected to approve the legislation later this week before it’s passed to President Joe Biden to sign it into law.
Lavrov said the world was experiencing a crisis in the system of arms control, disarmament and nuclear non-proliferation and that in order to prevent a further deterioration of a global crisis, joint efforts “were required to build an updated international security architecture based on the principles of multilateralism, equality and indivisibility,” RIA Novosti noted.
What we think: The focus is now on Russia again despite the Ukraine and Russia conflict going on for 2 years now after the Israel-Iran tensions have subsided. However, the market is unlikely to react much until a more direct confrontation happens.
Mark Zuckerberg says Meta will offer its virtual reality OS to hardware companies, creating iPhone versus Android dynamic
Notable Snippet: Meta will partner with external hardware companies, including Lenovo, Microsoft and Asus, to build virtual reality headsets using the company’s Meta Horizon operating system, the company said Monday.
The move will create new hardware devices that run on the same operating system and software as Meta’s current first-party virtual reality hardware, such as the Quest 3 and Quest Pro.
The move further defines the fault lines of the virtual reality hardware market, months after Apple released its $3,500 virtual reality headset called Vision Pro in January.
According to Meta CEO Mark Zuckerberg, who shared the news in an Instagram video Monday, the announcement essentially recreates the Android versus iOS dynamic in smartphones — only for virtual reality headsets. Apple’s VR product will remain pricier, and vertically integrated, but it will have to compete against a range of different hardware devices at various prices, all running atop Meta’s operating system.
The decision to make its operating system available to hardware partners also lines up with Meta’s stated strategic reasoning for spending billions of dollars per quarter on virtual reality technology inside its Reality Labs division. In the fourth quarter of 2023, Meta reported an operating loss of $4.65 billion in the division on $1 billion in sales.
What we think: This will put Meta’s VR platform as the Windows/Android of the VR systems market, allowing it to get a huge market share once this whole VR technology takes off. That will essentially make Meta a household name, much more than it currently is.
Sentiment
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord