After suffering its worst week since the first month of the year at the same time that the Nasdaq put in its worst weekly performance since last April and the Dow closed lower every day of the week for the first time since May 2012, equities roared back to the upside to start the new week on Monday. As a result of this frenetic market action, the major averages have not been able to establish a definite trend with the first three months of the year almost over, as the S&P was ahead by only one-half of one percent in 2014 as of Monday. The Dow and Nasdaq had moved two percent in opposite directions, with the former average lower by this amount while the latter was ahead by this much as of Monday’s close. This means that for all of the gyrations in both directions due to concerns about: 1) the potentially negative effect of the miserable weather that many parts of the country suffered for much of the winter; 2) what does the Federal Reserve have on hand for the tapering and interest rate picture, and 3) the negative vibes that have come from faraway places like China, Turkey, South Africa and India, in addition to the latest geopolitical anxieties from the Ukraine and Crimea, the net result has been very negligible net movements by the major equity indexes in this country.
As mentioned above, our stock market got clocked to the downside last week, primarily on concerns about an economic slowdown in China and the escalation of the Ukrainian crisis. China’s economy slowed significantly during the first two months of the year, as growth in investment, retail sales and factory output all declined to multi-year lows. This weak performance means that a sharper economic correction is not out of the question. As an example, China’s industrial output increased by “only” 8.6 percent in the first two months of the year, which was below expectations for a 9.5 percent gain. This was the worst performance for their factory output growth since April 2009. This raises the possibility that their central bank could take steps to loosen monetary policy if economic growth continues to slow and they would do this by lowering the cash reserve requirements that banks must keep on hand. Other areas of their economy also saw a weakening growth trend as retail sales increased by the slowest amount in three years, up by “only” 11.8 percent against expectations for a 13.5 percent gain. What really spooked our markets was trade data that showed exports collapsed by 18.1 percent during February. Since China is a proxy for economic growth in the developing world, this statistic alarmed investors here.
Then we had the preparation of sanctions by both the U.S. and the E.U. against Russia for its military incursions into Crimea and parts of eastern Ukraine. This means that dozens of Russians involved in this situation face travel bans and asset freezes, including the heads of Russia’s two biggest companies, which are energy giants Gazprom and Rosneft. Secretary of State John Kerry said that Russia would be guilty of a “backdoor annexation” of Crimea if its parliament ratified the Crimean referendum, which was approved with a 97 percent majority with people being allowed to only vote either “yes” or a “strong yes” to the annexation question under the intimidation of Russian military forces.
Russian Foreign Minister Sergei Lavrov backed off a bit when he said that Moscow had no plans to invade Russian-speaking eastern Ukraine which has seen pro-Russian groups occupy state buildings. On the other hand, he did say that Russia would respect the referendum itself.
As mentioned in last week’s column, this is not the Cold War of the 1950s and 1960s when the Communist Soviet Union did not have a stock market or freely functioning currency markets either. But today’s interdependence of world markets will keep this situation from getting out of control, as Russia’s stock market has lost more than 16 percent of its value in the two weeks since President Putin declared his right to invade. In addition, the cost of insuring Russia’s debt against default has risen by half since the crisis began. The Russian ruble has also fallen to a record low against the dollar.
Russian companies are suffering as investors flee that country as there have been cancelled IPO’s and suspended loan negotiations in addition to the plummeting stock prices, and these are all part of an estimated $50 billion in private investment that has left that country since the start of 2014 as fewer international banks are willing to lend money there. If the monetary outflow continues at its current pace, it will total $70 billion during the first quarter, which is 3.2 percent of their G.D.P. This could push the country into a recession this year as the 22 percent plunge in the value of the ruble will hurt shoppers in a country where imported goods account for more than 40 percent of consumption.
This is perhaps the best explanation as to why, after the trepidation in our stock market late last week over the Crimean referendum and its potential military and political implications, stocks here put in their best showing in almost two weeks on Monday after the worst overall week since January. At the same time, all of the supposed “safe havens” that investors had been reaching for as stocks were declining, namely U.S. Treasury securities, gold and the Japanese yen, sold off sharply to begin the new week.
Investors will now have to focus not only on these geopolitical developments in other parts of the world, but also on today’s F.O.M.C. meeting, the first one under the direction of new Fed Chair Janet Yellen, to discern the rate at which the tapering of monetary stimulus will continue and to read the tea leaves to see at what point the central bank might give a hint as to when they will raise the record low federal funds rate next year in response to better employment and economic growth conditions. This brew of both foreign and domestic events will certainly keep market participants on their toes in the coming weeks and I strongly advise that one pays close attention as events unfold.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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