A geopolitical stress test?

Mid-week market update: Geopolitical risks are rising and it remains to be seen how the market reacts to geopolitical stress. On the weekend, I made the following tweet.



Those fears are becoming more real. Ukrainian President Zelensky stated in a tweet, “Now we have information from our intelligence that the Russian military has placed objects resembling explosives on the roof of several power units of the Zaporizhzhia nuclear power plant.”


Even if there are explosives and they are triggered, the effect is unlikely to be equivalent to a tactical nuclear weapon. In all likelihood, the worst case scenario would be a Fukushima nuclear accident and not a Chernobyl style disaster. So far, global markets are soft but cannot be described as showing a strong reaction to this risk. 


Here is how the S&P 500 behaved in the wake of the earthquake and subsequent tsunami that devastated the Fukushima nuclear plant on March 11, 2011. The market tanked but recovered quickly, though 2011 also marked a budget ceiling drama in Washington and a Greek Crisis in Europe later in the year.


You can tell a lot about market psychology by the way it reacts to news – and we’ve seen more than a fair share of bad news today. China’s imposition of export controls on critical elements gallium and germanium hit the semiconductor stocks, but the NASDAQ 100 remains resilient. The release of the FOMC minutes revealed no big surprises. The Committee is divided and a quarter-point rate hike at the next meeting seems all but certain, barring an extremely soft NFP report Friday. Fed Funds expectations are largely unchanged following the release of the minutes.


These conditions argue for stock advance to continue. On the other hand, the S&P 500 is flashing a series of negative divergences.


As well, the put/call ratio continues to fall, which is an indication of complacency.


In conclusion, the stock market  faces a series of events in the short run, namely developments in the Russo-Ukraine War and the Jobs Report on Friday. Wait for how those sources of volatility resolve themselves before making a judgment on market direction.

1 thought on “A geopolitical stress test?

  1. The real geopolitical risk not the blow up the nuclear power plant per se, but that it would lead to an escalation of the conflict with more direct NATO involvement . This is what Zelensky is aiming at.

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