Market risks rising beyond Saudi oil attacks

Source: thinkpipes. For informative purposes only

Instability in the Middle East can undoubtedly contribute to global risk aversion flows, but given the independence of the United States' energy and market composition, systematic risks to the domestic economy are lacking. Many believe that rising energy costs create a drag on the U.S. consumer. This is partially true as rising energy prices translate to higher costs at the pump, but “gasoline and other energy goods" only account for 3.4% of total personal consumption expenditures (see graph below). Additionally, the S&P500's energy sector is only around 5% of the total index—much less than in years past—meaning that any positive or negative shocks may only marginally affect the broader market.

Source: BEA. For informative purposes only

While rising geopolitical risks may negatively affect pockets of global markets, investors may be writing off larger risks that have the potential to cause broader market turbulence. Optimistic trade dead headlines mask the fact that tariff increases continue, now aimed at goods that would most directly affect the U.S. consumer, and both countries' growth figures are sliding as a result. From a technical perspective, near-term momentum in the S&P500 has begun to roll over from a very overbought position, but intermediate momentum remains solid (see chart below or click here). As 2020 election campaigning approaches, the window of opportunity for a trade deal may be fading quickly. One might think that if a deal is not struck before campaigning ramps up, the Trump administration may have no choice but to revert to a hard lining China in an attempt to remain true to its original campaign promises. As if the trade war with China wasn't enough, reports are emerging that President Trump may levy tariffs against the EU within weeks, following what looks to be a looming WTO decision on the Airbus case in favor of the U.S.

Source: thinkorswim. For informative purposes only

On the central bank front, investors may be questioning whether we're nearing the tipping point in monetary policy effectiveness. Despite cutting rates and resuming its Quantitative Easing program, Mario Draghi and the European Central Bank (ECB) called on governments to launch fiscal measures to support the bloc's flailing economies. A divided Governing Council could mean that incoming chair Lagarde may face opposition in stimulating the Eurozone economy. That said, bond and equity markets may be expecting more from the Fed than they are willing to give, as the U.S. and its consumer-driven economy has remained largely resilient to the global manufacturing recession and business investment slowdown. Powell even admitted “monetary policy cannot provide a settled rulebook for international trade."

Consider the adage “when it rains, it pours." While market skies are still blue, dark storm clouds are in sight. The attacks on Saudi oilfields don't really have the potential to derail the U.S. economy even if energy disruptions persist, but there are a slew of larger risks mounting in the weeks ahead, including a potential pre-election shift in the U.S./China trade war rhetoric, a new trade war with the European Union, or a disappointment in the degree of global central bank easing.

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