China drove the markets two weeks ago, while the Ukraine was the big story last week. Looking at the week to come, it appears we may both issues in tandem. Thus far though, only the Chinese news is impacting markets in any significant manner, and only in Asia.
Global asset markets have acted very differently in recent weeks. Asian markets dropped on concerns about China, but European markets responded to the situation in Ukraine. Early Monday was no different: Chinese shares slumped nearly 3 percent on reports that China had a large trade deficit in February, but Europe opened higher due to the lessening of some tension in the Ukraine.
China’s export report poured fuel on the fire caused by the first domestic bond default in the reform era last Friday. Copper prices plunged over concerns that China’s massive stockpiles will be sold to cover bad debts. Copper is now flirting with a major support level of approximately $3.00 per pound, while the Shanghai Composite has fallen to 2000 once again. This level was hit in autumn 2012 and again in summer 2013. Bulls interpreted this testing of support as a double bottom, and now there is a chance it will test a triple bottom. There are already calls for a stimulus program to help the economy. The other possibility is that the market drops another 15 percent and challenges the lows of 2008, in which case there will be global financial turmoil.
In Ukraine, the Russian population of Crimea wants to rejoin Russia. This has put the issue back on top of the headlines, but there is little chance of escalation at the moment. The United States went to war in Kosovo to secure independence for that nation from Serbia, something the Russians do not forget because they strongly opposed that war. Given that the Russian dominated Crimea region was given to the Ukraine by Russia in the 1950s, it’s unlikely the U.S. or its allies will escalate the conflict to prevent a reunion. The main threat is Ukrainian nationalists could attack Russian forces in the country and set off a civil war. Since natural gas flows to Western Europe via Ukrainian pipelines, the economic impact of even limited military action would be grave if the pipelines were damaged.
Meanwhile, back in the U.S. economic data continues to plod along. The main indexes pushed to new highs last week, with the Dow Jones Industrial Average the last remaining holdout. Domestic shares could pull back this week though. They are nearing overbought levels and they have not priced in problems in China and Ukraine. Even if we experience a pullback, the U.S. remains best suited to endure any volatility. We don’t expect a near-term correction to be the beginning of something larger.
Economic Reports: Economic data has been weaker than expected in 2014, down from the inflated levels anticipated late last year, but consistent with the “new normal” post-2008. On Wednesday, the federal budget for February will be out. If the economy is weaker or stronger than believed, it will show up in a larger or smaller than expected deficit. Retail sales for February are out on Thursday.
Earnings: American Eagle Outfitters (AEO) and Dollar General (DG) highlight a very light week for earnings reports.