Volatility Will Overhang the Markets for Some Time to Come

American stock markets today, Monday, viewed several hours in advance of the 9:30 a.m. EST start appear poised for a mixed open. All three major indicators are in the red at time of writing, but the Nasdaq and S&P 500 are struggling to climb towards the green and could make it during the morning. Some erosion of Friday’s highs could occur this morning. The Dow closed at 35,061.69 up .68% on the day, while the Nasdaq closed at 14,836.99, up 1.04% on the day and the S&P 500 closed at 4411.79, up 1.01% on the day.

In Canada, the TSX 60 is also pointing down at time of writing.

European markets are open at time of writing and all major indices there are down with new concerns of tighter regulations and control – this time on education companies – by China. The drop started with the overnight markets in Asia and then continued with the European markets.

While the China news has spooked Asian and European markets and may threaten Friday’s highs on American markets, investors and analysts are awaiting quarterly reports from several blue-chip companies. Tesla Corp. and Hasbro Inc. report second quarter results today. Apple Inc. reports third-quarter results tomorrow and Google parent company Alphabet Inc. reports second quarter results, also tomorrow. Amazon.com Inc. reports second-quarter results on Thursday.  All of these reports are expected to show positive results and that will counterpoint nervousness about Chinese moves.

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

Amongst currencies the British pound sterling, Euro and Canadian dollar are all up against the American greenback.

Last week proved conclusively that volatility will overhang the market for some time to come. The roller coaster ride may be a template for future episodes. Last Monday, North American markets plunged with a gut-wrenching sell-off. The Dow Jones Industrial Average dropped 2.09% to 33963.29 while the S&P 500 lost 1.58%, dropping to 4,258.8 and the Nasdaq dropped 1.06% to 14,274.98. Investors worried about the spread of COVID 19, especially the Delta variant, tensions between the United States and China and inflation, all of which pose a potential threat to the recovery. The rebound that followed on Tuesday through Friday more than recovered Monday’s losses. On Friday, all three major indices hit record highs at closing driven by strong earnings during the week and signs of economic recovery. From the depths of Monday afternoon, no new closing highs would have looked imaginable. However, the Dow closed at 35061.69, the S&P 500 closed at 4411.79 and the NASDAQ closed at 14836.99. Those numbers would have seemed inconceivable on Monday.

Coping with today’s market means accepting that premise.

It’s an easy prediction to make since none of the major causes of volatility are going to disappear anytime soon. We will continue to be pulled in two directions over COVID 19. We have the optimism of making headway but at the same time we have the harsh reality that the United States reports surging case numbers in most states, below the all-time highs of the pandemic but still rising from two weeks ago.

Amongst macroeconomic factors, the market and investors continue awaiting every pronouncement about inflation from Federal Reserve Bank Chairman Jerome Powell. He has firmly insisted that inflation will slow but is under pressure to start tapering bond purchases to pave the way for interest rate increases.

Connecting the surging variant numbers with the Fed, it is unclear whether they will trigger any major policy changes.

In the American domestic political scene, we have huge hopes built up for President Joe Biden’s infrastructure plan, but several issues remain unresolved including spending on mass transit. According to a Reuters analysis other issues include wage provisions, drinking water safety, expanded broadband internet availability and the use of unspent COVID 19 funds.

In the geopolitical arena, relations between the United States and China are not likely to ease anytime soon and the tensions run in both directions. The U. S. has a list of issues including human rights abuses, intellectual property and cybersecurity. At the same time, investing in Chinese stocks means an added layer of risk. Under normal circumstances an investment decision in a company rests on traditional criteria such as appraisal of its management, sales prospects, cash position and outlook. With Chinese companies listed on Western exchanges the added risk is the clear determination of the Chinese government to exert control as became clear in the case Didi Global.

Last week the Chinese government announced a huge ‘enforcement’ action against the company. That came two days after the launch of its initial public offering. Didi commands approximately 90% of the Chinese ride hailing market including bicycle rentals and other services. Bloomberg reported that Chinese regulators are considering serious penalties for Didi after its controversial initial public offering last month which it undertook despite objections from the Chinese authorities.

Connecting geopolitics and macro factors with the economy, the volatility in oil prices also contributes to the overall volatility.

Indirectly connected but also relevant, the definitions of some equities are becoming blurred. The legacy automakers including General Motors Co., Ford Motor Co. and Volkswagen AG have started to look something like aggressive startups as they venture into electric cars and autonomous driving, trends driven by Tesla Corp.

These are only the largest of the factors currently driving market volatility. It’s not a complete list and none of them appears likely to change substantially in the short or medium terms. As happens regularly, I’m reminded of the words of the Ryan Gosling character in Blade Runner2049: ‘Buckle Up’.

Related: China Risks Need Careful Examination

Disclosure: I do not own and have never owned any shares in any company mentioned in this column.

Al Emid is a financial journalist broadcaster and author. His next book. The 2022 Emid Report on Volatility is scheduled for a Winter release.