The Iran-Israel conflict is disrupting the capital markets

April 15th to 19th (this week), in terms of economic data, China’s March economic indicators including first-quarter GDP, Japan’s March CPI, and U.S. retail and non-farm payroll data for March have all been released. It should be noted that the data from these three major global economies did not significantly deviate from market expectations. However, global capital markets experienced sharp fluctuations this week. Taking the Nikkei as an example, it fell by around 10% cumulatively this week, with Friday’s decline reaching as much as 3.5% at one point before finally closing down 2.6%, challenging the resilience of the A-share market.

Prior to this week, global capital markets had experienced some degree of pullback, with the U.S. stock market represented by the Dow Jones retreating to some extent due to CPI data. Although the 3.5% year-on-year increase in U.S. CPI data for March did not trigger panic-driven sell-offs in global capital markets, both the Dow Jones and Nikkei gradually retreated to support levels before breaking through them this week.

Looking at the current situation, the oil prices, which are closely linked to the conflict between Iran and Israel, surged significantly on April 19th (Friday) after gradually retreating in the first four trading days of the week, completely disrupting global inflation expectations. In the short term, with oil prices maintaining above $85 in April, and now in the latter half of the month, the U.S. CPI data for April is not likely to be favorable.

Taking into account various recent statements from the Federal Reserve, whether to raise interest rates this year seems to have become an option. John Williams (New York Fed) stated in an interview that the possibility of a rate hike cannot be ruled out. Of course, the latest statement from Powell suggests that a rate cut at some point this year remains appropriate, as he believes that interest rates are already at a restrictive level. However, major global investment banks are still predominantly bullish on oil prices. Although the current level of interest rates by the Federal Reserve does indeed appear restrictive, if oil prices remain high, there would be equally challenging decisions on whether to raise rates to forcefully suppress inflation. This is a very unfavorable expectation for global capital markets, leading to the apparent loss of support for global technical pullbacks.

In our operations last week, we refrained from initiating buy positions on the left side because we couldn’t discern the specific support levels. Perhaps after the Iran-Israel conflict stabilizes, there might emerge a support level in global capital markets. However, the expectation for an upward trend at this support level depends on oil prices and U.S. inflation expectations. Looking at U.S. Treasury bond yields, the two-year bond yield is probing the critical level of 5.0%, as we mentioned in the previous report, which is crucial and needs close attention (“Real estate does not suffer from oversupply” article). If bond traders opt to maintain trading at the 5% level for an extended period, it will exert significant pressure on global capital market liquidity, making opportunities for left-side stock purchases very slim.

Regarding the Iran-Israel conflict, the latest reports indicate reciprocal strikes targeting each other’s territories. In the face of Israeli strikes, we need to await Iran’s response in the coming week. Judging from the fluctuation and retreat of oil prices on Friday, Iran’s response seems relatively moderate, suggesting a decrease in the immediate risk of direct conflict between Iran and Israel. However, if the intensity of the Israeli-Palestinian conflict escalates again, it indicates that the risk of proxy conflicts between Iran and Israel has not diminished.

In the latest IMF World Economic Outlook report, the expectations for global economic growth in 2024 have been raised, particularly adjusting the U.S. expectations to 2.7%, an increase of 0.2 percentage points from 2023. However, the IMF report emphasizes that geopolitical risks may disrupt the global economic recovery process. The IMF’s World Economic Outlook report always provides us with some forward-looking information, which is a very important reference. From a practical perspective, geopolitical conflicts in the Middle East are indeed disrupting global capital market prices.

Looking at the next two quarters, as long as the U.S. and Iran do not engage in direct military conflict and Europe refrains from deploying troops into the Russia-Ukraine battlefield, the major global stock indices are likely to maintain an upward trend. However, there will be ups and downs in between, with key reference data being oil prices and U.S. real estate prices. Each unexpected rise in U.S. CPI will test the support levels of U.S. stocks. In the long term, there will still be returns from left-side purchases, but the intermittent pullbacks will continue to test everyone’s patience. After buying in, once the index shows signs of weak upward movement, it’s necessary to reduce positions and lock in profits.

While global gold prices have been surging, briefly surpassing $2400 on Friday, the logic behind last week’s speculation primarily stems from persistently high U.S. inflation expectations, driving the rise in prices of this scarce asset. Another rationale is the rapid increase in U.S. bond yields, prompting a shift of major reserve assets globally towards gold. From these two perspectives, gold seems poised to maintain a bullish trend, with little sign of downward risk currently.

Let’s delve into the viewpoints on the latest economic data. Comparatively, the U.S. economy is experiencing both expansion in quantity and price, while the Eurozone’s economic growth is contracting, although the Eurozone’s CPI level has notably decreased.

Recent information indicates statements from European Commission members guiding towards interest rate cuts in the Eurozone. There are now opinions suggesting that the Eurozone may undergo 3-4 interest rate cuts in 2024, which has been evident in the stock markets of Germany and France, though without consecutive declines.

In Japan, the latest CPI data shows the core rate dropping to below 3%, which may be one of the key factors propelling the Nikkei beyond the widespread global downturn. Whether there exists an opportunity for left-side purchases in the Nikkei still awaits Japan’s economic growth data. Currently, the interest rate level is not restrictive, and we can observe Japan’s bond market. If the yield continues to rise, the Nikkei index still holds long-term upside potential.

China’s March data saw a marginal decline compared to January-February, primarily due to a robust monthly year-on-year growth rate of 9.9% in manufacturing and 6.5% in infrastructure in March, supporting overall growth. However, price factors still present unfavorable conditions, with the year-on-year decline in secondary housing transaction prices in 70 large and medium-sized cities accelerating, suggesting overall price factors may remain relatively weak in the near future. Despite first-quarter GDP growth reaching 5.3%, asset prices remain subdued. Over the past two weeks, the Shanghai Composite Index has oscillated narrowly between 3000-3100, with no breakthroughs either way. During this period, despite new “nine policies” and the central bank’s statement that there is still room for monetary policy, they have not altered the index’s volatility range. While the index performance has been stable, there have been significant shifts between sectors, with sectors related to equipment upgrades and trade-ins experiencing sharp increases, while small-cap stocks have seen significant retreats. At this stage, investment still prioritizes enterprise profitability, with no speculative concepts prevalent.