Equity markets managed to regain their footing this week, as major concerns regarding protectionism and geopolitics appeared to be easing. While more waves of risk aversion are not to be ruled out over the coming weeks, given that many hazards still loom, the broader picture on both the trade and the geopolitical fronts seems to be gradually improving.
Major stock indices managed to claw back some of their recent losses over the past week, as anxieties surrounding protectionism, geopolitics, and tech regulation started to fade. The initial catalyst for the advances was a speech by Chinese President Xi Jinping, in which he avoided provocative rhetoric relating to the trade spat with the US, instead vowing to open up China’s economy further and to lower import tariffs. This aided speculation that the situation is more likely to be resolved through negotiations, instead of escalating further.
Then came the Syrian news. While the week began with concerns that a US attack in Syria was imminent, and that this may lead to a military standoff between the US and Russia, President Trump soon backpedaled on his threats. He tweeted that a strike could take place “very soon or not so soon at all”, which investors interpreted as a signal that a military action is not so imminent after all.
The final piece of ‘good news’ for stocks was Facebook CEO Mark Zuckerberg’s testimony before Congress. While the tech sector had been battered in recent weeks on expectations of tighter regulation due to Facebook’s privacy scandal, the testimony showed that an approach of “self-regulation” by these companies remains firmly on the table, easing concerns over actual regulation and helping tech stocks to rally.
Moving forward, the performance of major equity indices in the near-term may depend primarily on how the Syria situation and the trade spat play out, as worries around tech seem to have moved out of the spotlight for now. Of course, the earnings season will also be a major driver, as it will provide a snapshot into the effects of the tax overhaul, and show whether recent trade tensions impacted confidence.
With regards to Syria, while the US may still attack, any strike appears increasingly more likely to be a surgical, isolated incident, as opposed to the beginning of a major military operation. If so, it’s unlikely to impact sentiment for too long, even if there is an initial risk-off reaction on the news. As for the trade spat, rhetoric appears to be easing on both sides. Looking beneath the surface, recent announcements on tariffs still appear to have been posturing and “raising the stakes” ahead of serious negotiations, not the opening salvo in a trade war that would harm all involved. Moreover, both sides have delivered subtle hints that even the already-announced tariffs could be scratched in case they reach common ground in talks.
The key risk to this view are recent media reports suggesting the White House plans to announce fresh tariffs against China next week. China has already retaliated to every US measure – and has pledged to retaliate to any new actions as well. If such tariffs unfold, they would likely trigger another wave of risk aversion, weighing on equities in the near-term. However, even in this case, the broader theme that the situation may be resolved through negotiations would not necessarily be derailed.
Taking a technical look at the Dow Jones, further advances could encounter resistance near the April 5 high of 24,630 – notice that the 100-period moving average on the four-hour chart lies not far above at 24,718. An upside break of that zone could target the March 21 top of 24,980, with the area around that level also encapsulating the round figure of 25,000. Steeper bullish movements could stall near 25,450, the March 12 peak, and further up at the index’s all-time high at 25,800.
In case of declines, support may come initially at 24,150, the April 11 low, and subsequently near the 23,740 hurdle, defined by the trough of April 6. Further down, buy orders may be found at 23,345, a level that halted the April 2 decline, with the area around it also capturing the February low of 23,360.
