PMC Market Commentary: June 13, 2014
A Macro View – Simmering Geopolitical Risk
This week we had another pungent reminder of geopolitical risk. The self-proclaimed Islamic State of Iraq and Syria took advantage of the divisive policies of current Iraqi leader Nouri al-Maliki and seized control of the northern city of Mosul, which is not only a large urban center of nearly 2 million people but is also near some of the country largest oil refineries.
With equities markets up consistently over the past four weeks, it is hardly surprising that the news coincided with a modest dip in markets and a surge in energy prices. But while the instability in Iraq is surely troubling and a sign that the Syrian civil war and years of strife in the region – including two American wars – will be a chronic source of uncertainty and a potential trigger for geopolitical and financial turmoil.
That said, unless matters spiral into some sort of regional conflagration, the crisis in Iraq is rather on par with the crisis in the Ukraine. Both are simmering and unresolved and offer the possibilities for real global contagion, especially insofar as both involve vital oil or natural gas resources that many other countries depend on. But neither are as yet market events of the first order. Yes, if you have a portfolio with a considerable allocation to energy, either directly in the form of commodities or less directly through options, funds or bonds, how Iraq plays out will likely shape prices, though not necessarily beyond the short-term. And yes, these events matter greatly in terms of the ongoing rearrangement of the political balances in the regions. That, however, is distinct from the strictly financial and investing implications of these events.
Overall, equity markets have been enjoying a rather steady multi-week rally, though the major indices are still up modest single digits through nearly half of the year. Bonds yields, meanwhile, remain extremely low worldwide, perhaps in the face of new rounds of quantitative easing and liquidity measures announced by both China’s central bank and the European Central Bank in early June. There is little to suggest any sharp break, though of course such sharp moves tend to come unexpectedly. The fact that markets have been relatively placid is not, in our view, a cause for concern, but nor should it be a recipe for complacency.
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