Markets 101 in times of nasty world politics

Jul 24 2014, 00:27 IST
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SummaryLike so much in the investment world of late, it’s what financial markets are not doing right now that is most intriguing.

Like so much in the investment world of late, it’s what financial markets are not doing right now that is most intriguing. Over the course of the past month, conflicts, superpower standoffs and economic sanctions have flared in Iraq and Syria, Israel and Gaza, Ukraine and Russia.

All are at least potential threats to world energy supplies, if not globalised business links and supply chains. What’s more, a September referendum looms on the potential breakup of the world’s sixth largest economy as Scots vote on secession from the rest of the UK.

Yet the world’s main financial markets have barely blinked. Crude oil prices gyrated briefly on the upsurge in the Iraq/Syria violence but net moves have been slight to non-existent. At around $108 per barrel, Brent crude is roughly where it was at the start of this year — and where it started last year and even the year before that.

In the face of all this seeming uncertainty, energy price volatility has in fact sunk to its lowest on record.

For some, energy prices moved to discount this more economically integrated but less politically stable globe more than 10 years ago, when they quadrupled in the early 2000s. And the persistence of $100 plus per barrel oil in itself reflects that more fragile state of affairs. Little of what’s happened this year will have materially altered that picture beyond a relatively small $1 or $2 pop in futures markets premia for near-term supply disruptions.

For all that strategists puzzle over the lack of price reaction to last week’s downing of a Malaysian airliner over Ukraine, many acknowledge that recent history does not support a view of either spiralling conflict or direct links between political violence and lasting market or economic fallout.

“In my mind, the market is not assigning a high enough probability of this situation escalating to uncomfortable levels but the reality is the most likely outcome is that it doesn’t,” said Deutsche Bank’s Jim Reid.

Even if western sanctions on Russia — the world’s eighth largest economy — are ratcheted up and Russian markets are as exposed as their near 10% drop over the past 10 days suggests, investors know that seeing through periodic spikes in political tensions would have paid off time and again. “Russia has oil and gas; it is inconceivable that the West will take any meaningful macro sanctions that would endanger the supply of Russian energy

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