Welcome back to recession. Actually, the “new style” concern is inflation, after the European Central Bank [ECB], Bank of England [BOE] and International Monetary Fund [IMF] all pounded that fear down the market’s throat this past week. However, the true catalyst behind the move in the markets certainly had something to do with the double-digit rise in oil prices and geopolitical tensions. Stocks sold off on the week, with the Dow Jones Industrials declining 2.4%, the S&P 500 falling 1.8% and the NASDAQ Composite drifting 1.3%.
The market started falling even before the central bank decisions and fear-inducing press conferences. Geopolitical issues and petroleum and gasoline price rise were very likely catalysts behind the market’s dismay. What started during the prior week, with Turkish air raids on Kurdish rebels, and the resulting Kurdish threats of retribution against American forces in Iraq, continued this past week with new catalysts.
Geopolitical tensions seemed to spread and intensify all week long. The Supreme Leader of Iran announced that his country would not back down to international pressures, and would continue forward with its nuclear program. That same day, a U.S. general declared that America could not engage Iran now, with fires to put out in both Iraq and Afghanistan.
As if that was not enough, Nigerian petroleum production and distribution came under further stress, as rebels attacked infrastructure in the major petroleum-producing nation. By the end of the week, attention had turned to Venezuela, as The Wall Street Journal reported that President Hugo Chavez had actively offered assistance to Columbian rebels.
Meanwhile, a very interesting event is taking place in Lebanon, where Hezbollah has taken over parts of Beirut. At the same time, the tiny Republic of Georgia declares that war with Russia is a very real possibility.
Take note, there seems to be a clear underlying driver behind oil price movement that is counter to supply trend. After all, petroleum inventories increased sharply again this past week, rising by 5.7 million barrels. Meanwhile, just weeks after Israel staged a nationwide drill more intense than any in its history, Wall Street Greek hears of a closed-door Federal Advisory Committee meeting of the U.S. Nuclear Command and Control System Comprehensive Review Advisory Committee scheduled for early June.
Yes, we mean to insinuate that the bombing of Iran may not be very far off, and may be playing a role behind the rise in oil prices. Goldman Sachs (NYSE: GS), an investment bank often in the know, this week reported expectations for an oil price spike to $200 in the next year or two, and a natural gas price spike as well. So, some very “smart money” might be behind the counter moves in oil and stocks.
The Week Ahead
This week’s economic reports may be less important to stocks than the resolution of last week’s geopolitical tensions. However, April’s Retail Sales Report (Tuesday) and Consumer Price Index (Wednesday), and May’s Consumer Sentiment reading on Friday carry significant importance.
The week ahead includes earnings reports from: Monday – Imperial Sugar (Nasdaq: IPSU); Tuesday – Applied Materials (Nasdaq: AMAT), Cameco (NYSE: CCJ), Whole Foods (Nasdaq: WFMI); Wednesday – Deere & Co. (NYSE: DE), Double Hull Tankers (NYSE: DHT); Thursday – Hewlett-Packard (NYSE: HPQ), JC Penney (NYSE: JCP); Friday – Abercrombie & Fitch (NYSE: ANF), British Airways (Nasdaq: BAIRY.PK) and more.