This is Not a Good Time for Speculation

American markets today, viewed several hours before the 9:30 a.m. Eastern time opening, appear poised for a negative start with the S&P 500, Dow and NASDAQ all in the red. The S&P is struggling at time of writing and it is possible – but by no means assured – that it could reach into positive territory before or after market opening.

Canadian markets appear poised for a more positive start with the TSX 60 and TSX Composite barely in the green at time of writing.

European markets are open at time of writing and are mixed. The FTSE 100 has moved into positive territory but the DAX and CAC 40 remain firmly negative.

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

Amongst currencies, the Canadian dollar, the Euro and British pound sterling are all down against the American greenback which has been burnishing its status as safe haven currency. That follows its weakening yesterday, explains Lawrence Kaplin, Chief Market Strategist at London-based payments firm Equals Money. “The dollar weakened yesterday afternoon despite comments from Fed(eral Reseve Board) Chair (Jerome) Powell on Monday evening that a 50bps rate hike could be seen this May should it be needed,” he says. The British pound and Euro are both under pressure with inflationary pressures including oil prices, he says.

Overhanging worries about the Russian-Ukraine war and inflation, some analysts will undoubtedly be mulling over remarks yesterday by Carl Icahn, billionaire founder and chairman of Icahn Enterprises, that an economic downturn could be coming. “I think there very well could be a recession or even worse,” he said during an interview on CNBC. Icahn said that surging inflation presented a threat to the economy and that the Russia-Ukraine war added more uncertainty to the situation. Icahn’s stature is such that his outlook will certainly be seriously considered by many.

That follows yesterday’s session in which technology companies rallied back from recent drops Amongst the FAANG+ stocks Apple Inc., Microsoft Corp, Facebook/Meta Platforms Inc., and Alphabet provided a lot of the green in the session.

Shares in Nike Inc. rose $2.92 or 2.24% to close at 133.11 after it beat estimates and provided an optimistic outlook.

Action in the Canadian market was driven by bargain hunters according to Philip Petursson, chief investment strategist at IG Wealth Management. “It’s not energy, it’s a rebound in technology – in particular Shopify – as the bargain hunters have started to come back and pick away at some of the tech names,” he said in a Reuters report. Shopify rose C$51.93 or 6.03% to close at C$912.50

Still, politicians, traders and investors continue watching the Ukraine tragedy as Russian air strikes level the port of Mariupol and reduce it to smoldering rubble.

The crisis will have a long and deep impact on Europe and European equities, according to James Athey, Investment Director at Abrdn in London. 

“European reliance on Russian energy, gas in particular, isn’t new information but in the current situation it is incredibly relevant. So far it has manifested in a reluctance to follow the United States stride for stride in applying sanctions,” he says.

Now, however, national politicians of some of the most heavily affected countries have openly called for the sort of sanctions that would amount to serious economic self-harm. What is not clear is the extent to which American President Joe Biden’s expected announcement of measures to reduce Europe’s dependency on Russian energy will soften the blow to Europe’s energy needs.

Governments in Europe are prepared to try to use their balance sheets to reduce the impact on consumers and business but the size of the energy price shock is already too large to be completely offset, he says. “That won’t prevent them trying and if they can use the combined balance sheet strength of the European Union itself, then they will do so,” he explains.

Europe continues digging itself deeper and deeper into a debt hole because the region systematically refuses to admit the inconvenient truth which is that broad, inclusive economic prosperity and this form of partially constructed and ill-fitting monetary union are mutually exclusive. 

Not surprisingly, Athey says that the total economic hit for Europe from input cost increases and general uncertainty will likely be substantial. “Equities in the region have already expressed their nervousness,” he says. In addition, with tighter monetary policy by the European Central Bank on the horizon this would not be a good time to add exposure to European equities.

While much of the world’s attention will be focussed on tomorrow’s meeting of the North Atlantic Treaty Organization – NATO – the inevitable announcements are not a basis for investment decision making.

“If your investment decisions are being heavily influenced by very near term and completely unquantifiable risks like a NATO meeting then I fear one has already strayed into ‘speculation’ territory,” Athey says.

If Icahn and Athey have it right -- this is not a suitable time for speculation. In fact, it will not be a good time for speculation within the near future.

Related: This is a Good Time to Revisit the Concept of the Risk/Reward Ratio

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.