STOCK INDEX FUTURES, GEOPOLITICAL CONCERNS AND INTEREST RATES
If the ongoing U.S., China trade uncertainties and the U.S., North Korean issues weren’t enough to destabilize financial markets, we now have a new geopolitical worry that is roiling financial markets.
The political crisis in Italy comes at a time of elevated tensions between the eurosceptic populists, who emerged victorious in the March Italian elections and the pro-European Union establishment, amidst looming prospects of new elections in Italy over the country’s role in the European Union. There are fears that sentiment towards Italy will deteriorate as a result of the current political situation that could result in capital flight and a further worsening of Italy’s already high TARGET2 liabilities. This new political worry has adversely affected stock index futures, just as some of the older geopolitical issues appear to be on the way to being resolved, or at least partially resolved.
The U.S., China trade rift appears to be improving. It was early March when the opening salvos were fired. President Donald Trump ordered tariffs on steel and aluminum imports and, pending a public comment period, he planned tariffs on still more products from China. The $50 billion in tariffs on Chinese imports was in retaliation for what he called decades of intellectual property abuses. China responded with tariffs of its own and threatened more to come when China’s ambassador to Washington said China will take counter measures of the “same proportion” and scale if the U.S. imposes additional tariffs on Chinese products. Some progress was reported more recently, however, when China said it will reduce its import tariff on autos from 25% to 15% starting 1 July, and import tariffs on auto parts will also be cut to 6%, which is down from between 8% and 25%. Further talks were planned.
Chart 1: S&P 500 Futures - Monthly
Also, relations between the U.S. and North Korea, though still rocky, appear to be improving. So now it appears that the on-again-off-again meeting between President Trump and North Korea’s leader is still scheduled.
With that being said, keep in mind that from when the recession lows for stock index futures were made on 9 March 2009, there have been a multitude of geopolitical events that have temporarily interrupted the bull market for stock index futures. I must stress the word temporary because every time traders and analysts have become too focused on the geopolitical risk event of the day, stock index futures were rescued by central bank accommodation. The recoveries were often swift with new highs not far behind.
In fact, since the lows were made over nine years ago, there have been a multitude of geopolitical issues, which temporarily pressured stock index futures. Many of them appeared insurmountable at the time with little hope of being resolved any time soon and were feared to have catastrophic consequences for the stock market and the global economy. In the early stages of the bull market for stock index futures there were times that these negatives came in faster than some central banks could ease credit conditions, including the European Central Bank, the People’s Bank of China and the Bank of Japan and faster than the Federal Reserve and the Bank of England could talk back their hawkish rhetoric.
RELATIONS BETWEEN THE U.S. AND NORTH KOREA, THOUGH STILL ROCKY, APPEAR TO BE IMPROVING.
Source: QST
24 | ADMISI - The Ghost In The Machine | May/June 2018
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