Markets: the Calm before the Storm

Posted: September 3, 2013 in Uncategorized
Tags: , , , , , ,

September highlight

This month there are a number of dangers in the market which we are not comfortable with,

as one of the main objectives of our strategy is capital preservation.

– Australian election: at the moment the polls indicate a Liberal win and that would be a positive for the market

– Syria: a potential war could lead to volatility both because of potential oil price spikes or, even worse, potential spillover of the conflict in Israel, Lebanon, Iran and Turkey (member of NATO).

– End of Quantitative Easing. This could lead to a sudden outflow of capital from the share market, in particular from emerging markets. Emerging markets, in particular India and Indonesia, are already starting to suffer a liquidity crisis .

– Reach of the US Debt Ceiling by 15 October. In 2011 the ensuing battle between Democrats and Republican has been what provoked a 10% fall in the global markets.

-Nomination of the new US Federal Reserve Chairman: Bernanke, current chairman, will resign in January 2013. Within the next month President Obama will announce his successor.

The two main candidates are Mr. Summer and Mrs. Yellen. Mr. Summer is currently seen as the winning candidate and the his ideas are against Quantitative Easing and so his election would spur a market retreat. Mrs. Yellen would be viewed as a positive for the stock market.

-German election (21 September): at this moment the polls indicate that Mrs Merkel will be re elected and this should be a positive for the market

– Soon after the outcome of a challenge of the German Supreme Court to the European Stability Market (ESM) system powers will be notified to the public. This could be a mildly negative for the market as the ESM is the mechanism that allowed to contain the European Crisis.

As you can see there are too many random events to predict with any kind of certainty what the market could do – even if the odds are clearly on the negative side.

In Depth

Australian Election

As of now it seems PM Tony Abbott will win. I am not going to delve into the various policies as there are already plenty of analysis in the various newspapers. A Liberal Party strong win will be seen as a confidence booster for the Australian share market as the Liberal party is seen as favorable to business condition.

Syria

 

The Syrian battlefield is, in reality, a proxy war between the two emerging Middle Eastern powers: Iran (Muslim Shia) and Saudi Arabia (Muslim Sunni).

In August 2011, US President Obama clearly stated that the usage of chemical weapon against the population was a clear red line that would warrant intervention. With every probability he thought nobody would have dared to cross that line.

 

Even if the US clearly does not want to enter another Middle Eastern war, a non intervention would send a clear message to Iran, North Korea, Russia and China that the US is not anymore a world superpower, but more a “first between equals”. This could even be seen as the start of the US decline by its enemies.

On the other side an attack could lead to help Al Qaeda seize power in Syria or, at worst, a Middle East war that involves Syria, Iran, Saudi Arabia, Israel, Turkey (and consequently NATO) and the flaring up of a Second Arab Spring and cyberwarfare – this option, although threatened – is pretty minor as it would escalate a conflict that Assad cannot win. More likely we would see some cyberwarfare increase and an increase of Hezbollah terrorist activities against Western and Israeli targets. This is why Obama is seeking Congress approval and a broader alliance.

 

US Federal Reserve New Chairman

 

The two main candidates (quite often there is a last minute candidate) are both academics, but very different from each other.

 

Mrs Yellen is seen as an astute negotiator and is seen as a continuation of Bernanke’s pro-market policies. She is currently Vice -Chairman of the US Federal Reserve System. Per converse she has very few political alliances and she is seen with hostility by the Republican for the “dovish inflationary views”.

Mr. Summers, instead, is a pretty controversial figure that openly declared that the Quantitative Easing (money printing) does not have any effect and he will terminate it as soon as possible. He is one of the fathers of the financial deregulation in the US and, moreover, when he was Harvard University President he lost almost all of the entire endowment fund of the University (USD2 Billions). He is a very keen politician with a lot of political alliances and personal friend of President Obama.

 

All this negativity will have just a temporary effect on the market as the Syrian war, if it happens, will be most likely soon over and the US Fed Chairman has to act within a board and build consensus as in any democratic institution.

 

So, at all effect, this September will be a “buy the dip opportunity” than a second 2008 Global Financial Crisis. But we are prepared for every eventuality

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