The U.S. stock market has demonstrated strong momentum as of late with the Dow Jones nearing its record high with a 37-point rise to 27,219 points amidst growing trade deal optimism.
While strategists generally remain bullish on the short to medium-term trend of the U.S. equities market given the progress in the trade deal talks between the U.S. and China, there are variables that could interfere with its upside movement.
Attack on the world’s largest oil processing plant to pose a new threat to global stock market performance
On September 14, Mike Pompeo, the secretary of state of the United States, stated that the government of Iran initiated an attack on Saudi Arabia’s oil plants, affecting nearly 5% of the daily output of the global oil sector and increasing more uncertainty in the global stock market.
Following the attack, some analysts have suggested the possibility of decline in the stability of the oil market, noting that the equities market, which has seen a relatively large inflow of capital moving out of the bond market to stocks as of late, could see a short term sell-off in the stock market.
Dan Tepiero, the founder at DTAP Capital, said that safe haven assets like gold along with bonds and potentially bitcoin as an alternative store of value could see increasing demand in the aftermath of the attacks, which could lessen the upside momentum of the global economy.
“Iran attacked Saudi Arabia and knocked off 50% of total Saudi production, 5 million barrels. Biggest attack on oil prod since Gulf war Supply should be back within a week? More geopolitical premium needed on oil price. Gold +50 USD on Monday? Bonds should rally. Maybe even BTC safety bid?” .
Expectations are high for the next round of trade deal talks, October could be a variable for Dow Jones
In October, negotiators from the U.S. and China are expected to engage in a new round of discussions to potentially secure several partial deals to work towards a complete deal rather than negotiating for one comprehensive deal.
The progress of the trade deal talks is said to have been priced into the global stock market with investors anticipating a partial deal to be done by October and expectations were further fueled when U.S. President Donald Trump delayed the imposition of new tariffs in October in what strategists described as “rare move.”
If the next round of trade deal talks fail to meet the expectations of investors and the talks end without a partial deal, a short term slip in the stock market remains a strong possibility, especially with the manufacturing sector already demonstrating signs of a recession.
Too much stimulus from central banks to boost sentiment
Earlier this week, Mario Draghi, the president of the European Central Bank, was criticized by analysts and central bank executives for introducing a wave of stimuli that are not proportionate to the slowdown in the growth of the global economy and the stock market.
Hans Michelbach, a member in the main opposing party in Germany, said that Draghi is pushing the same medicine that has not worked in the past, possibly inflating the economy artificially and putting the stock market at risk of vulnerability.
“[Cheap money and bond buying] only encourage speculation, a rejection of reforms and unsound fiscal policy. But what we need to stimulate growth in the eurozone as a whole is structural reforms and an interest rate that is in line with the market, which also reduces risk,” he said.