Markets Rise, Show Faith Amid Turmoil

Markets Rise, Show Faith Amid Turmoil

With political crises in Brazil and the US and OPEC struggling to maintain its agreement to curb production, US and global stock indexes rose Monday as crude oil prices jumped one percent. 

US President Donald Trump meets King Salman bin Abdulaziz Al Saud of Saudi Arabia |
US President Donald Trump meets King Salman bin Abdulaziz Al Saud of Saudi Arabia | Official White House Photo Shealah Craighead (CC 4.0)

On Wednesday of this week the Federal Reserve will release the minutes from their latest meeting. Money managers and analysts will be looking closely at every nuance of their discussion for clues on whether the next increase in the Fed Funds interest rate will take place at the next FOMC meeting on June 14. The Fed has indicated that it may do more than one increase to borrowing costs this year and that event is just one of many that investors are keeping an eye on. 

While Pres. Trump makes his first overseas trip to Saudi Arabia, Israel, Brussels, and Italy, the ongoing investigation into possible Russian influence on the 2016 election continues to take new turns. Former National Security Advisor Michael Flynn refused to comply with a subpoena from the Senate Intelligence Committee, invoking his Fifth Amendment rights. 

Trump's first stop in Saudi Arabia was marked by the signing of multiple multi-billion dollar deals by US companies with governments of the region. Trump is also trying to sway Israel and Arab countries to work together by portraying Iran, which just re-elected Pres. Rouhani on a platform of greater openness and moderation, as their shared enemy. The largest deal, a $110 billion arms sale to Saudi Arabia, could face legal challenges since Saudi Arabia is believed to be using US-supplied arms against civilians in Yemen, a violation of current US law. 

Traders had also been doing a lot of speculative buying of Brazilian stocks and the real after former President Dilma Rousseff was finally ousted on corruption charges. That bullishness has given way to a selloff in Brazil-related assets, as her successor, President Michel Temer, faces corruption allegations of his own which, if proven, could show a widespread culture of corruption among Brazil's elite. Brazil has struggled to attract tourism and foreign investment despite being a world leader in natural resources and the 9th largest economy in the world. 

The main driver of the stock rise on Monday was energy, as oil prices surged by a full percentage point ahead of OPEC's meeting in Vienna on May 25. While Saudi Arabia and Russia (not an OPEC member) have publicly committed to continuing their reduced output through 2018 in an effort to raise oil prices, OPEC as a whole is struggling to maintain the commitment. One member in particular, Iraq, has been cheating on the deal, pumping 80,000 barrels more per day than permitted. Iraq's capacity has grown in the years since Saddam's overthrow. At the same time, the fight against Islamic State has left the country deep in debt and badly in need of oil income.

All of this makes the stock surge of the last few days look like little more than a rebound from a Fibonacci support level, with no news strong enough to propel it past recent highs. That's not to say it won't make new highs this week. If the Fed news somehow spurs optimism, the markets are close enough that one strong rally would take them over the top.

But it's hard to see what news might give the markets sustained optimism. The president's trip is half over, with the NATO and G7 visits likely to be marked by protests. His visit with Pope Francis may not be as warm as his visit with the Saudi king, given the criticisms the two have exchanged in the past. What's more, next week we may see testimony by former FBI Director James Comey before the Senate intelligence committee. The markets are likely to run into both political and technical resistance in the next few weeks. 

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