Global markets on the edge, awaiting US, UN decision
Financial markets will be unsure which way to jump this week but uncertainty is not usually something that markets like or choose to ignore. Frayed nerves generally take stocks lower and boost bonds.
But one thing we can say with some certainty is that investors will not be piling back into treasuries with the Fed decision on whether to wind down its QE money printing program now scheduled for the 18th of this month.
Before then, perhaps as early as the end of this week we will have the UN inspectors’ report on the Syrian gas attack in Damascus. Will the smoking gun point decisively to the regime or perhaps some extremist rebels looking to entice the US to attack and join in their fight?
President Obama is convinced the regime is to blame. His Russian counterpart says it was the rebels seeking US air support. The attack was certainly suspiciously close to the UN inspectors’ hotel in Damascus.
That’s the problem with Middle East politics for many observers elsewhere. They always want to see things in black and white and get on what they see as the right side. But these neat divisions are seldom present. Warring tribes is still a far better analogy. Religious allegiances also tell you very little.
Still what would be the economic impact of a US-led reprisal attack on Syria? It’s clearly not good for the oil price and that was the biggest factor that tipped markets over in the autumn of 2008. Would it not be the same this time around?
At the same time financial markets are overextended after a four-and-a-half year rally from the depths of March 2009. What goes up must come down eventually.
Their major prop, some would say their only prop, is the Fed’s zero interest rate policy. If the Fed starts to wind this down there will be mayhem in the markets. On that nobody is disagreed. That QE is now very expensive and ineffective at boosting GDP is also pretty clear.
The cost of money is set by US bonds. If yields fall then other asset prices rise. If yields (i.e interest rates) go up then this whole happy party is over. The Fed knows this only too well but then again we do not live in a world where asset prices go up ad infinitum, they are cyclical.
Be prepared for a turning of the cycle very soon, and the stock market is unlikely to keep its nerve in anticipation. All asset prices will plunge, and another war would make it worse.