Geopolitical Issues are Back, but Fed Minutes will Determine if Excessive Volatility Returns

Volatility is returning to the stock market as evidenced by Tuesday’s late session sell-off and today’s early follow-through move.

Shortly after the opening in the cash market, the benchmark S&P 500 Index is trading 2714.53, down 9.91 or 0.36%, the blue chip Dow Jones Industrial Average is at 24735.66, down 98.75 or -0.40% and the tech-driven NASDAQ Composite is at 7350.50, down 27.06 or -0.38%.

Possible Return of Volatility

Although stocks have been supported for nearly two-weeks due to a softening of geopolitical concerns, yesterday’s price action and the comments from President Donald Trump suggest that these worries may return, encouraging investors to pare positions and making stocks a less-desirable investment.

To recap the events driving today’s price action, on Tuesday, President Trump said he is not satisfied with the outcome of last week’s trade talks between the United States and China. Trump further rattled investors by saying a highly anticipated summit with North Korea may not happen at all.

Trump’s comments about the trade negotiations are rattling investors because nobody wants to see a trade war. However, all is not lost. While Trump said he was “not satisfied” with the trade talks that took place with China last week. He called the negotiations a “start” as his administration keeps working toward a final deal to address trade imbalances with Beijing.

The reaction we are seeing in the stock market is quite normal. We’ve seen for years that despite the bullish long-term fundamentals, investors have had a tendency to pare positions due to uncertainty. The real selling will begin if China counters Trump’s comments with negative comments of their own.

Stocks could break sharply if China agrees with Trump that the trade talks are basically going nowhere. This will bring the two-economic powerhouses closer to a bona fide trade war. If China doesn’t respond to Trump’s comments then this will be an indication that the current negotiations are still on and that a solution will eventually be released.

Renewed North Korean Concerns

Investors are also taking precautions against geopolitical concerns regarding renewed tensions with North Korea. No, both countries haven’t reverted to threatening each other with nuclear weapons, but President Trump’s tweet on Tuesday suggests the summit with North Korean leader Kim Jong Un, scheduled for June 12 in Singapore, may not take place at all. Trump told reporters at the White House, “Whether or not it happens, you’ll be knowing pretty soon.”

This comment is likely to trigger a short-term reaction since the U.S. and North Korea have until June 12 to fix any lingering issues.

Fed Minutes

In February, stocks dropped sharply and volatility returned with a vengeance because of two factors –rising inflation and geopolitical worries.

One half of the potentially bearish equation has returned – geopolitical concerns over trade with China and North Korean nuclear issues. The second shoe could drop later today at 1800 GMT with the release of the U.S. Federal Reserve Monetary Policy Meeting Minutes.

Given the impact of the renewed geopolitical concerns, if the Fed mentions greater than expected concerns of rising inflation then stocks could take an even harder hit later today and over the short-run because this would mean the central bank would have to be more aggressive in raising rates in trying to stay ahead of inflation.

Start preparing for wild stock market swings and triple-digit price moves if the Fed is extremely hawkish and issues escalate between the U.S. and China, and North Korea.