Notwithstanding the Confusion in the Markets Some Things Are Clear

American markets today, Wednesday, viewed several hours before the 9:30 a.m. Eastern time opening appear poised for a strong start with the S&P 500, DOW and NASDAQ all in positive territory at time of writing. Traders and investors generally believe that the Federal Reserve will announce a 25 basis-point interest rate hike this afternoon but wonder what comes next in terms of both rate hikes and inflation, while also wondering about what comes next in the Russia-Ukraine war.

The S&P is wavering somewhat but looks likely to stay positive for the trading day.

Canadian markets appear poised for a strong start as the TSX 60 and TSX Composite are in positive territory.

European markets are open at time of writing and have been in strongly positive territory since the start of the session there. The FTSE 100, DAX and CAC 40 are strongly in the green and show no sign of slipping into negative territory during this session.

Amongst precious metals, the safe havens of gold and silver are down.

Amongst currencies, the Canadian dollar, the Euro and British pound sterling are all up against the American greenback, although only marginally. The Euro is in a fairly healthy position, according to Lawrence Kaplin, Chief Market Strategist at London-based financial firm Equals Money. “The Euro had a better day yesterday and again this morning and is now 3 cents up since the low we saw against the pound on the March 08,” he says. “It also gained well against the dollar, moving around a cent higher. There was very little data yesterday and the move was probably related to safe-haven flows.”

The pound has limited room to run, Kaplin says. “A few minutes ago, we had United Kingdom unemployment and wage data which came in better than expected.”

Kaplin says that as in the United States, the British market is pricing in an increase of 25 basis points by the Bank of England on Thursday.

“However, it is unlikely the prospect of interest rate rises will help the pound given the current macro-environment.”

That follows yesterday’s rally as the S&P 500 broke three days of gut-wrenching sliding, helped by falling oil prices and easing of some inflation fears. In a surprise of sorts some travel stocks did well. Delta Air Lines Inc. closed at $34.85, an increase of $2.70 or 8.66% on the day while United Airlines Holdings Inc. closed at $38.24, up $3.22 or 9.19% on the day. Hilton Worldwide Holdings closed at $144.29, up $273 or 1.93% on the day and Starwood Property Trust Inc. closed at $23.18, up $0.43 or 1.89% on the day.

The focus now turns to the Federal Reserve’s rate announcement expected for 2:00 p.m. Eastern time.

While a rate hike of 25 basis points is near-certain, little else can be assumed as the Fed attempts to unwind its massive financial support package.

“The ’25′ is a given. What matters most is what comes after,” said Simona Mocuta, chief economist at State Street Global Advisors in a CNBC report. “A lot can happen between now and the end of the year. The uncertainty is super high. The trade-offs have worsened considerably,” she said framing a common market sentiment. The important question then is the Reserve’s plans for the remainder of the year.

At the same time, traders and analysts are awaiting the outcome of Russia’s $116 bond payment also due today. Whatever happens today, it is only the first step in Russia’s payment problems. Russia has 15 international bonds with a face value of around $40 billion outstanding, around half of them held by international investors, according to a Reuters analysis. The coupon payment scheduled for today is the first of several, with another $615 million due over the rest of the month. The first principal payment is due on April 4 when a $2 billion bond matures. The bonds linked to today’s coupon payment were listed in 2013 and are to be paid in U.S. dollars.

In practical terms Russia has a thirty-day grace period after today. Meanwhile, the Russian financial system continues eroding. Fitch Ratings Group yesterday downgraded six non-bank financial institutions to ‘CC’ from ‘B.’ Fitch says that the ‘CC’ rating means that ‘default of some kind appears probable and also cites ‘the deterioration in the Russian operating environment following the imposition of sanctions by the US, EU and other jurisdictions.” The problems go beyond mega-loans as financial firms move to divest Russian holdings while complying with their obligations under economic sanctions.

Investors can be forgiven for wondering where to put their hard-earned dollars and whether to make any moves with their portfolios and considering some old-time principles may help. “Over the long run stocks will go up in line with the growth of gross domestic product but will sometimes get well ahead of it at the end of bull markets such as the end of last year and in 2000 and below it at the bottom of bear markets like 1982 and 2008,” says Gavin Graham, Chief Strategy Officer at SmartBe Investments and Contributing Editor at The Income Investor.

Notwithstanding the confusion in the market, some things are clear. Consumers will keep eating, drinking, taking medicine, buying their Nauruan eggs and taking trips as Covid restrictions allow. Temporary sell downs over the misunderstanding about Smirnoff Vodka (which is not made in Russia) which dragged Diageo PLC and the shutdown by McDonald’s of its Russia locations will affect earnings but companies selling life necessities will continue growing. 

At the same time, some companies will have experienced permanent changes to their competitive position such as may be happening with tech giants like Facebook and Amazon as anti trust regulations and pushback on content reduce their enormous profits.

Graham says that investors should focus on companies that are profitable and pay reasonable dividends, meaning a higher return than from bonds and cash.

That being the case, energy companies, financials, utilities and pipelines, telecoms, dividend paying technology and healthcare stocks are most likely to rebound most quickly and be more resilient in down markets. A small weighting of gold, of between 5% and 10% will reduce volatility due to its non-correlation with other assets, Graham says. And right now, reducing volatility is not such a bad idea.

Separately it may be useful to re-examine the place of the FAANG+ stocks. Some companies will have experienced permanent changes to their competitive position as may be happening with tech giants like Facebook and Amazon, given antitrust sentiment and the pushback on content reduces their enormous profits.

Lurking in the background is a nervousness about the new virus outbreak in China and what it could mean for the global economy.

Whatever happens today and during the rest of the week it is reasonable to believe that volatility will be with us for some time.

Related: This Is Not Going to be an Easy Week in the Markets

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.