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Sacking McChrystal and the Possible Market Implications

By Greg Holden

Few market analysts are willing to take the time to consider how a change in US command in Afghanistan could affect world markets, and not without reason. A political change, such as that taking place right now in Washington and Kabul, has only a distant and convoluted impact on equity markets; but one worth exploring nonetheless.

Consider for a minute that the war in Afghanistan is a wide channel of American defense spending through which billions of dollars flow. This defense spending has obvious opportunity costs: that money could have easily been used to stave off large chunks of recent economic crises, for instance. One can’t help but wonder where our economies would be without these costly wars; but I digress.

The intricate web of companies involved in the rebuilding and protecting of Afghanistan and Iraq are affected by changes in policy which either grant or remove further access. Any disruption in leadership or strategy can also cause a decline in transparency and could result in contractors delaying their ventures and investments.

More importantly, however, is that the markets are currently shaking in their boots from the dovish statements by the FOMC yesterday and by recent declines in investor sentiment. The needed repairs from the BP oil spill – along with its political and economic fallout – has damaged many sectors and dampened investors’ appetite for risk.

Wide swings abound in the value of the US dollar which bounced from 1.2135 to 1.2665 in May against the EUR; and 1.2340 to 1.1870 and back up again so far in June. Don’t even get me started on the GBP/USD, which has experienced sharp 150-pip price swings daily for the past 2 months. It appears as if investors are hesitant to invest.

Combine this with a leading US general who gets his jollies by taking pot-shots at his civilian overseers, and what many see happening in the US right now is a narrowing of coherence and stability. The number of account managers at investment firms, such as ForexYard, which have been telling me on a daily basis that their clients are simply too scared to invest helps to clarify the picture somewhat.

Doubling the impact of this very natural fear is a thin trading environment due to a myriad of influences – often as simple as the explanation that many traders are watching the World Cup instead of trading.

But here’s the silver lining. Despite the quivering we see among investors, the results of this uncertainty are actually making things more clear in the market right now. These wide price swings have very clear pivot points and long, smooth-ish trends.

Here are a few examples:

The Russell 2000, as shown below, has a neat up and down movement that has a rhythm in line with taking deep breaths for the doctor during a check-up. Breathe in, breathe out… good. Jumping in on these swings is one of the easier things I’ve seen traders do for profits these past few months.Russell Chart

 



Disclosure: no positions