Investors unmoved by Syria attack

April 16, 2018 09:35 AM

Heading into the new trading week, investors across different asset classes feared that the U.S.-led strike on Syria would become the new catalyst to sell risk assets. However, Saturday’s operation, that also included the U.K. and France was a limited one, and intended to be a one-off as President Trump declared "mission accomplished." Many feared the attack would probably lead to a broader confrontation, but the conducted strike was not strong enough to bring Russian retaliation. The limited reaction in currency markets on Monday shows investors are relieved somehow and expect no significant escalation.

The fall in crude oil prices is another sign of relief after last week's geopolitical tensions drove Brent to its highest levels since 2014. Another source of pressure came from U.S. energy companies; seven oil rigs were added in the week to 13 April, bringing the total count to 815, a level last seen in March 2015. Despite the 1% fall in early trading, I think there’s still a lot of risk premium in current prices, and with further ease in geopolitical tensions, I expect to see an additional drop below $70.

It’s going to be a busy week ahead for financial markets, specifically on the earnings front, with about 60 S&P 500 companies due to report results. So far, 70% of companies that already reported actual results managed to beat Wall Street expectations on EPS. If the positive surprise didn’t diverge from current levels, there’s a high likelihood of companies reporting 20% growth in earnings. Tax cuts are the undoubtedly the key factor behind the expected earnings growth. Additional factors were also in play, including the dollar’s weakness which boosted multinational overseas earnings, and the rise in the price of oil, which is expected to boost earnings growth in the energy sector by 79%, according to FactSet. 

With such a positive earnings season and with better valuations compared to a year ago, there’s a good reason for the bulls to take over control. However, this also depends on how much noise we’ll have in the background, whether it is Russia-U.S. relations, Middle East geopolitics, trade tensions or higher inflation expectations; the list goes on.

There’s also a lot of data releases this week to attract traders’ attention. In the United States, the economic calendar focuses on housing and manufacturing sectors, but retail sales figures released later today are likely to move the dollar the most. Chinese first-quarter GDP results will be released on Tuesday and markets expect a 6.7% growth YoY. Trade tensions will be an important factor to focus on over the coming quarters, but so far China continues to grow at healthy levels. Any upside surprise in China's GDP could potentially send the Aussie higher.

About the Author

Hussein Sayed is chief market strategist at FXTM.