I watch news channels, but mostly for entertainment. Many years ago I learned that markets disclose more useful information than talking heads.
I had this realization in the 1990s while serving in the Air Force where I had the good fortune to visit the Middle East and South Korea as tensions rose in those regions. .
At first, I attended intelligence briefings thinking that officials should know everything. But I quickly realized that there were a lot of assumptions in their analysis. (Note, the methods are better now than they were then, and I’m sure the parsing has improved.)
At the time, there seemed to be a bias towards climbing. Almost everything seemed to be hostile intent.
I was also a trader at the time and observed the markets from these places. There was often a disconnect between the news presented and the price action. If there were to be a war in the Middle East, I expected oil prices to rise. When they fell, I believed the issues could be resolved peacefully.
But news and prices don’t always move together that way, and there’s a simple reason for that. Large companies devote considerable resources to market research. They are risking billions of dollars based on their analysis. They won’t always be right, but they tend to understand the gravity of the situation better than the news. If big business feared war, we would certainly see oil prices rise.
I thought about it on Saturday morning. We woke up to the news that a potential coup was underway in Russia. Wagner Group the tanks were pushing towards Moscow instead of kyiv. It was well-trained mercenary forces that threatened Russian President Vladimir Putin’s hold on the Kremlin.
In a few hours, the danger passed. Wagner’s leader, Yevgeny Prigozhin, announced that he wanted to avoid bloodshed. He was going into exile. His troops were returning to Ukraine.
Analysts are still trying to make sense of Prigozhin’s actions. If this was an attempt to overthrow Putin, he did not have the support he needed from other officials. Some believe it was intended to give Putin a reason to purge his enemies from the government.
All speculations are interesting. But the market says it wasn’t much.
Stock markets tend to make big moves during coups. Turkey provides a recent example.
A blow that shook the world markets
In July 2016, the armed forces moved against President Recep Erdoğan. The coup attempt lasted two days. Hundreds have been killed. When Erdoğan repelled the attack, he arrested tens of thousands of plotters and potential plotters.
The unrest began on July 15, a Friday, just as the stock market was closing. iShares MSCI Turkey ETF (Nasdaq: TUR) plunged nearly 9% when trading opened the following Monday. The TUR fell 16.8% before bottoming out later in the week.
Russia, effectively the former Soviet Union, also offers an example of market reaction to a coup. In August 1991, extremist communists took control of the Kremlin. Under the Soviet Union, there was no stock market. So we have to look at how traders in other countries reacted to the news.
This coup shook global stock markets. The Dow Jones Industrial Average fell 4.6% in two days as traders assessed the situation.
Big moves are expected around events like this. Unexpected news is priceless in the markets.
Traders need to act quickly to push prices to a new level based on events. We see this trend after the release of the results. Analysts update their fundamental models based on the news, and traders push prices up or down to reflect those changes.
Now, let’s take a look at how traders handled this weekend’s coup.
The Russian Trading System Index (RTS) is shown in the chart below. This is a local currency index of Russian stocks, so it reflects the reaction of Russian traders.
RTS fell about 3%, less than the movement seen in previous coups. The reaction also seems particularly muted compared to the massive sell-off in response to the war in Ukraine.
The market is not always right. But it does a good job showing the trend of important events. His verdict is that no changes in Russia should be expected in the short term.
Cheers,Michael CarrEditor, Precision Benefits
Fed Chairman Jerome Powell fired a warning shot at Wall Street.
On Wednesdayat the European Central Bank’s Central Banking Forum, he effectively told investors not to assume he would ease policy anytime soon.
However, Powell was quick to throw a wet blanket on the prospect of getting more sporadic rate hikes after the June “pause”.
When asked if the Fed would raise rates every other meeting, Powell replied:
“We haven’t made the decision to go there. It may work that way. It may not work that way. But I wouldn’t take, you know, the move in back-to-back meetings off the table at all.
There is a word for that. This is called the “jaw”. Powell hopes to be able to influence policy by simply hinting at it, without having to do anything.
Does jawboning work?
Well, I’d say the Fed’s jaw lost some power once Wall Street discovered the “Greenspan put,” named after former Fed Chairman Alan Greenspan.
Greenspan set a terrible precedent by rushing to the rescue with a flood of cash at the first sign of stress.
Now, whenever a Fed Chairman threatens to go “nuclear” and ultra-restrictive, investors generally ignore him. They know that as soon as things get worse, the Fed will simply back off and flood the capital markets with new liquidity.
Powell also did himself a disservice by suggesting that inflation would not reach its 2% target this year, or even next year. This tells us that they really are not determined to fight inflation.
So it looks like Powell huffs and puffs and threatens to blow up the house, but no one takes him seriously.
It would make more sense for Powell to come out strong now and make an effort to break inflation before we get another stock market bubble. Because that’s exactly what’s happening today…
You know that I am extremely optimistic about artificial intelligence and its future impact on our economy. But today, we see investors cramming into a small core of mega-cap tech stocks, regardless of price, just on the idea that they will benefit from AI.
This is no way to manage a stock portfolio.
Again, I’m bullish on AI. Savagely bullish on AI. But I’m not just going to buy Nvidia and hope for the best. It’s not a strategy.
And if you’re interested in how AI can be used to help you trade smarter and more efficiently, check out what Mike Carr does in his Trade room. He is working on integrating this technology into his trading strategy.
Charles SizemoreChief Editor, The edge of the banyan