Markets in the crossfire: Geopolitics and Inflation
The investment world is currently experiencing an extraordinary period of tension. The themes of early April include unpredictable geopolitics, a faltering German economy, and investors' concerns about Friday's US inflation report. The market is now questioning whether the optimism at the start of the year is giving way to lasting uncertainty.
Geopolitics: Will Trump strike or not?
The current market nervousness stems directly from the White House. President Trump’s statements on Iran have been highly inconsistent: one moment he threatens of an imminent military strike, the next he speaks of `great progress` in peace talks. The market has also reacted strongly to these messages. As long as the fear of an attack and disruptions in the Strait of Hormuz remain, the price of oil will not be able to fall. This elevated energy price level directly fuels global inflation, complicating central banks' efforts to stabilize prices.
German inflation and the DAX's volatility
Germany, the economic powerhouse of Europe, will publish its confirmed inflation numbers for March on Friday, April 10. Preliminary data showed that inflation had accelerated to 2.7 percent, and the markets are now keenly watching to see whether the increase in energy prices (previously estimated at +7.2%) has been even more drastic than expected.
Germany's main index, the DAX, has been on the defensive, falling over 14% from its ATH (All Time High) peak but recovering some of the losses. High energy costs are severly impacting the core of German industry, particulary its export-drivers sectors. Since the German export industry is the backbone of Europe, its problems are quickly reflected in economic growth and earnings expectations across the eurozone.
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US inflation and the technical battle of indices
Investors will also be focusing on the United States on Friday. The rise in oil prices in March could pose an unpleasant surprise, with analysts' consensus for annual (YoY) inflation has risen to 3.3 percent. An increase from the previous reading (2.4 percent) would be significant. Should inflation accelerate significantly, it is likely that the Federal Reserve would maintain higher interest rates for an extended period, which could negatively impact equity market valuations.
Both the S&P 500 and NASDAQ have declined in response to heightened geopolitical uncertainty. The S&P 500 was down at highest just under 10% from its all-time highs, while the NASDAQ was down almost 13%. Despite a strong recovery last week, both indices have fallen below their significant 200-day moving average (SMA200). From a technical analysis perspective, this is interpreted as a bearish signal, indicating a weakening of the long-term trend.
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Summary
This week presents a particularrly challelnging environment for investors, as market conditions remain uncertain Trump's unpredictability implies that the market's direction could shift at any moment.
”No attack” -scenario: Falling oil prices, easing inflationary pressures and a potential stock market rally (risk-on).
”Attack” -scenario: Oil price above $120, inflation spike and risk-off in the markets.
Inflation data from both sides of the Atlantic, to be released on Friday, will shed light on whether last week's recovery was just a "dead cat bounce" or the start of a more sistained rise
Indicators shown on the graphs:
● SMA200: SMA200: 200-day moving average, red.
● SMA50: 50-day moving average, blue.
● EMA25: 25-day exponential moving average, yellow.
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