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How Geopolitical Tensions Could Affect Safe-Haven Assets

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Part 2
How Geopolitical Tensions Could Affect Safe-Haven Assets PART 2 OF 5

Will Strong Earnings Help Equities to Detriment of Haven Assets?

Geopolitical concerns and markets

In the long term, geopolitical concerns don’t tend to move markets much, but markets can get upset in the short term. The US launched surgical strikes on Syria over the weekend. While this might move the markets slightly lower today, other fundamental factors should take over soon thereafter. Many markets such as Japan and other Asian markets have already shrugged off the strikes. An escalation of tensions, however, either due to Russian retaliation or more strikes from the US and allies could mean the risk-off sentiment in the markets affects equity markets negatively.

Will Strong Earnings Help Equities to Detriment of Haven Assets?

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Volatility in the markets

The index has been in correction mode since February 2018. The steeper rise in inflation and wage growth in February increased expectations for a faster interest rate hike process by the Fed. In March, President Trump’s various announcements about the imposition of import tariffs on steel, aluminum, and Chinese goods increased expectations of a global trade war. All these events affected investor sentiment both in February and March.

Credit Suisse (CS) wrote in a note that the outflows from passive funds invested in the US stock markets over the last two months are the highest since 2008. Jack Bogle, the former CEO of Vanguard Group, said, “I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50 percent declines, I’ve seen a 25 percent decline in one day and I’ve never seen anything like this before.”

Could a robust earnings season help equity markets?

The US earnings season kicked off on April 12, 2018, with the consensus expecting the S&P 500 (SPY) companies to clock an earnings rise of 17% year-over-year in 1Q18. The US banks didn’t disappoint on earnings. J.P. Morgan (JPM) beat estimates with net income up 35% YoY, while Citigroup (C) reported a 13% rise in net income compared with the same quarter a year earlier. While analysts are expecting a blockbuster quarter for  US companies, most market participants still feel that this might not be enough for equity markets to take off. If markets still don’t get a boost from a strong earnings season and the volatility continues, gold and gold miners (GDX) could rise.

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