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Geopolitical risk leaves traders cautious

General geopolitical risk, falls in the tobacco sector and a sudden change at the top of Tesco have kept markets on the back foot.

City of London
Source: Bloomberg

Scenes of conflict dominate news screens at present, be they in Gaza, Syria or Ukraine, and the result for financial markets has been an outbreak of risk aversion. Amidst all the noise and contrary signals traders will have their work cut out for them to establish a clear picture, as shown by the sharp drop and equally sharp bounceback on the final two days of last week.

The possibility of fresh sanctions against Russia are dominating the news in Europe, which accounts for why the DAX is suffering more heavily than the FTSE, given Germany’s close trading links with the Russian bear.

Imperial Tobacco and British American Tobacco are taking a chunk out of the index too this morning, on news of a major fine for one of their US rivals.

News of Philip Clarke’s abdication (or dethronement, depending on your view) at Tesco was greeted with a quick rise in the share price, a reflection perhaps of the low esteem in which he was held. The new man comes with a squeaky clean image, having been behind the Dove soap ads, but his long history of dealing with Tesco and his outsider status means that the board knew a good thing when they saw him and are prepared to back him as he attempts to turn around the weary titan. 

Today is the relative calm before the earnings storm this week, but overall the season has got off to a good start. If anything can counter the negative news from Ukraine and elsewhere it will be this, with manufacturing PMIs this week also being crucial for the overall rally.

Yet again the small caps are being touted as a warning that the market is entering another choppy patch, especially given the index’s underperformance versus its bigger cap brethren, but the durability of this rally has been doubted before, so it would be wise not to get spooked by the low-volume volatility that is the standard at this time of year.

Ahead of the open, we expect the Dow Jones to start 40 points lower at 17,056.

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