Weekly Focus: American Stock Market Passed Geopolitics

The geopolitical crisis in Eastern Europe continues as the Russian invasion continues for the sixth consecutive day. Nobody can even anticipate the end of this war. The West is devastating the Russian economy with financial, trade and economic sanctions. But such sanctions do not only hold a threat for Russia, but also for the global economy.

The freezing of more than 60% of Russia’s central bank assets was largely unexpected and very painful for the Russian top decision makers. But this move may push the Russian government to default on the Russian corporate debt that is estimated to be at $478.2 billion at the beginning of 2022. This may seem to be appropriate collateral damage for the United States, but for some European countries or large financial institutions, it may be critical to provoke a chain of defaults. To cushion such a possible threat the European Central Bank (ECB) must maintain interest rates close to zero and urgently raise its bond buying programs. This may result in soaring inflation and such measures may resemble  the action of  pouring gasoline into fire. The economic consequences may be very painful.

But all this is far from happening at the moment. American investors are seen to be full of optimism, taking advantage of the situation as expectations of aggressive interest rate hikes by the Federal Reserve (Fed) during its meeting in the middle of March are fading. Thus, fundamentally long positions in the U.S. stock market may be justified. The S&P 500 broad market index futures were down by 2.0% on Monday early trading but recovered by ending the day in positive territory.

Military actions in Ukraine are likely to continue this week. But there is a conservative assumption that American investors have just stepped over these geopolitical risks and are looking towards the testimony in congress by Fed chairman  Jerome Powell on Wednesday. Mr. Powell is expected to tame current hawkish rhetoric by the Fed.

The technical picture confirms such expectations. We may confirm that the S&P 500 index chart formed an upside pattern with a target at 4550-4600 points. However, to attend this rally we need to wait for the index to move down to 4240-4280 points. The price was there on Monday and may not provide another opportunity to open long positions.

Crude prices have met targets of the “$100 per barrel” scenario and reached $101.50-102.50 per barrel for the Brent crude benchmark last week. The geopolitical crisis in Eastern Europe and sanctions on Russia would further support high crude prices. The U.S. has announced new interventions in the oil market. But prices will hardly go down significantly since the geopolitical risks are already in place. However, the restoration of the nuclear deal between U.S. and Iran may lower crude prices as 1.0-1.3 barrels of crude per day may return to the market.

Gold prices continue to move above $1900 per troy ounce thanks to the geopolitical risks. However, the period of weak gold prices has started, and may last until the middle of April. Gold prices have a significant potential to move down to test $1840 per ounce, and in case of a breakthrough to dive deeper to $1650-1750 per ounce. So, closing of long position may be justified, as well as a readiness to go short .

Geopolitical fears on the FX market led to the appreciation of the U.S. Dollar. EURUSD hit the lowest support level of the week at 1.11300 and bounced back to 1.12200. The Greenback is strengthening. But due to a lot of uncertainties, opening any positions would have a significant risk behind it.

GBPUSD is on the downside track with the lowest support level is at 1.33000. High volatility does not provide any good entry point for the short position at the moment.