The Volatility Continues

Equities rebounded on the belief cooler heads will prevail regarding trade. Some also believe earnings reports should lower volatility. Equities were exhibiting relative strength until late in the afternoon when the headlines read that Trump’s lawyers office was raided by the FBI over the Stormy Daniels’ payoff.

As noted many times, the averages are dominated by headline risk. Headlines that are the primary component for trading decisions, the result for the relentless drive for the cheapest and quickest execution and to heck with any type of geopolitical or macro-economic analysis.

Speaking of headlines, how will Facebook’s CEO congressional testimony be perceived? His prepared remarks were released yesterday, remarks where the company expressed contrition.

According to some, however, Zuckerberg is going to be lambasted as Facebook is viewed as the poster child for Silicon Valley’s attitude towards privacy. I believe privacy is a basic human right and once trust/privacy is lost, it is almost impossible to recover.

Changing topics, some are stating relations between Russia and the US are the worst since the Cold War. Russian equities, which in many regards are dominated by western momentum monies, fell Monday be the greatest amount in four years. The Ruble fell the most in three years, the result of sanctions against prominent Russian billionaires and the companies that they control.

Are these declines of any significance? Twenty years ago, at the onset of the interconnectivity of the financial markets, a similar Russian decline was a precursor for volatility in the western markets. At this juncture, I believe it is just “noise,” but such could be of greater interest especially as it relates to the oil markets.

Speaking of crude, oil advanced over 2.25% on increased geopolitical tensions, tensions that involve Russia. Last week, I referenced a Goldman report stating that energy equities are the most undervalued as compared to the S & P 500 in at least 50 years.

Historically, on average, crude represents about 9% of the S & P 500. Today it is less than 5%. Moreover. energy equity shares are priced for about $25/barrel, not the current price of $64. It is not a question as to if this imbalance is corrected, but when.

Equities should open sharply higher today after China’s President stuck a conciliatory tone during a major speech. Xi said Cold War and zero sum mentalities were “out of place” and backed free trade and dialogue to resolve disputes. Treasuries fell in price and oil surged another 1.5%. President Trump is also striking a more conciliatory tone and at this juncture recent fears of a trade war are perhaps overblown, thus reinvigorating faith in the continuation of the synchronized global growth story.