Stock Market Focus on Earnings Amid Geopolitical Stress

The massive surprise attack on Israel by Hamas over the weekend adds to an already fluid set of potentially destabilizing scenarios around the globe that only makes investing in U.S.-based assets that much more attractive. This is an unprecedented attack that will result in a major escalation that has regional implications, beginning with how nations will view the long reach of Iran as the sponsor of terror in that part of the world. One thing is certain, the long-running Arab-Israeli dispute just got hotter.

There are obvious deep-set problems with Russia and North Korea, but trouble can also be seen brewing given souring relations with Saudi Arabia over the murder of Jamal Khashoggi, a Saudi journalist and Washington Post contributing columnist since 2017. Khashoggi was killed in Istanbul at the consulate of Saudi Arabia in 2018. According to a U.S. intelligence assessment, Saudi Crown Prince Mohammed bin Salman approved an operation to capture or kill him.

Mexico has overtaken China as America’s biggest trading partner as the U.S. looks to import goods closer to home and minimize its reliance on geopolitical rivals. Imports from Mexico now account for 15% of total imports compared to 14.6% from China, per data compiled in July. Meanwhile, foreign direct investment (FDI) in Mexico is up more than 40% this year as U.S. companies increasingly shun China, Bloomberg reported.

With that said, the crisis of illegal immigrants at the southern border and the influx of fentanyl by the cartels is largely being allowed to continue by Mexico’s government. Officials with the U.S. Drug Enforcement Administration say there’s no question Mexican drug cartels are fueling the explosion of deadly fentanyl on American streets. U.S. law enforcement officials say in recent years, Mexican officials have refused to cooperate on efforts targeting fentanyl labs inside Mexico.

Relations with China are slowly freezing up as well. The trend of moving business out of China is picking up momentum. American companies are relocating to other Asian nations with India being a newfound source of re-shoring high-tech businesses. The restrictions on China are definitely putting pressure on that economy but have not slowed China’s massive military buildup and its intentions to take control of Taiwan.

Additionally, there has been little if any progress on the “seven deadly sins” agenda that prompted the staggering tariffs imposed on China. Theft of intellectual property, forcing technology transfers, hacking, dumping, subsidizing, importing fentanyl and currency manipulation made up the list. And what happened to any movement on human rights abuses to the Uyghur population? Beyond detentions, Uyghurs in the region have been subjected to intense surveillance, forced labor and involuntary sterilization.

Each of these sets of geopolitical circumstances looks like they will deteriorate further before seeing any improvement in cooperation or real change for the better. Considering the importance of each country noted to the national interests of the U.S., it argues well that some of the rallies in the dollar of late can be attributed to the broadly growing level of uncertainty around the world in such key markets. The other catalyst driving the dollar higher is the attraction to higher Treasury yields. The currency is following the yield curve, even as the Treasury is selling record amounts of bonds to cover the federal deficit.

This flight to safety in the U.S. currency and short-term Treasuries is accompanied by strong buying interest in investment-grade corporate debt with short maturities and U.S. equities in companies that have fortress balance sheets. This is why on some big down sessions for the stock market, as yields run higher, shares of the Magnificent Seven and other blue-chip growth stocks trade higher in what appears to be a counterintuitive move.

As the earnings season comes to light this week, it will be a relief to focus on the business of business and look for the market to move into a seasonally bullish time for investors. Whether the market can trade up and through the ongoing macroeconomic and geopolitical headwinds is anyone’s guess, but Wall Street does love to reward upside surprises and strong forward corporate guidance. It should be an interesting few weeks ahead to see how all this unfolds.