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Risk aversion market sentiment prevails

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
What is the reason for this sudden change? The market switched its focus back on geopolitical events

Russian Foreign Minister Lavrov has reawakened fears of a nuclear confrontation, warning that the risks are growing to the extent that Western countries are supplying heavy weapons to the Ukrainian army. All analysts agree that President Putin should show the success of his military operation in early May. The chances of this happening are decreasing, given that the Ukrainian army is getting increasingly more equipped. Russia's reaction to this eventuality is unpredictable. The war in Ukraine, which had lost intensity in terms of its effect on the market, has returned to the stage again.

This circumstance adds to Russia’s announcement to cut off gas supplies to Poland because this country refuses to pay in rubles. Moreover, a German minister stated that a complete embargo on Russian oil would be "manageable.”

If we also consider the ongoing Covid-19-induced lockdowns in China (with the port of Shanghai blocked) and problems in the supply chain, we find all the ingredients for the market to react in fear mode.

Investors are beginning to be more concerned about the negative effects of the war and China's supply problems on the economy than about the interest rate hikes that the Fed might carry out next week.

The clearest sign of a risk-off market can be seen in the performance of US Treasury Bonds, which were strongly bought, reaching a yield of 2.73%.

 

Yesterday’s purchase of bonds was a positive signal that drove the stock markets higher in anticipation of a not-so-aggressive action by the Fed.

The good results that most North American companies are publishing, 80% of them topping analysts' forecasts, remain in the background given the worsening of the geopolitical scenario.

 

The Nasdaq index suffered the biggest daily loss of the year, over 5%, and closed below the major support level around the 12,950 area. From a technical point of view, if it continues to drop, it will enter a bear market.

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Sources: Bloomberg.com, reuters.com

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.