Markets have been quiet for a few weeks now.But various economic and geo-political market moving events are expected to make September much more volatile.
Nomura’s Senior Political Analyst Alastair Newton has highlighted 10 key risks in his latest report: “Issues Which Keep Me Awake At Night.” We summarize here:
- Europe “EU in September” – Spain and Italy are likely to get external help in bond markets but with conditionality. But governments of both countries face domestic challenges that could “trigger political instability”. While a Grexit continues to be likely, Italy and Spain pose a greater risk of break-up. The eurozone itself is under-threat as “bail-out fatigue” is growing in the Netherlands and Germany.
- United States “Elections and taxes” – “We still see the election as President Obama’s to lose”. Irrespective of the outcome of the election though, the post-election period will be dominated by negotiations on fiscal issues and a debate on raising the debt ceiling. Failure to reach an agreement could send the U.S. into a recession in the first half of 2013, according to the Congressional Budget Office.
- Iran/Israel “Serious or sabre-rattling” – There is a low probability that Israel will strike Iran and markets are more concerned about such an attack than they should be. Yet, “we do not totally rule out a strike before the US presidential election on 6 November, eg if Iran ramped up activity at its Fordow enrichment plant”.
- China “From fourth to fifth generation” – “We expect to see incremental policy easing to drive a pick-up in growth through Q3 and into Q4, consistent with the authorities’ lower tolerance for a slowdown during the leadership transition.”
- East Asia maritime borders “Renewed tensions” – Tensions are rising between China and Japan, and Taiwan over the disputed Senkaku/Diaoyu Islands. Both governments are however expected to calm tensions quickly given their political cycles. Meanwhile, South Korea and Japan are locked in a dispute over the Takeshima/Dokdo Islands and China is in a dispute with the Philippines over the Spratly Islands.
- Korean peninsula “Turbulent times” – The recent changes in the North Korean military are part of Kim Jong-un’s efforts to “consolidate his grip on the country and possibly to wrest back power from the army to the Workers’ Party of Korea”. This could be to control the country’s mineral resources, and this could cause “bad behaviour in Pyongyang” – the capital of North Korea spurred by the South Korean presidential election in December.
- MENA “Oil and more turmoil” – Markets are increasingly worried about the war in Syria and its impact on oil output. But this shouldn’t threaten oil output across the region. In Iraq, Kurdistan’s regional government is in dispute with Baghdad over energy policy and could limit investment in oil extraction and processing.
- Pakistan “Political and security uncertainty” – Pakistan is ramping up efforts to squash Islamic militancy and this could cause Washington to give indiigenous forces more responsibility over security in Afghanistan. “However, in our view it could also risk a further escalation in terrorism in Pakistan itself and increase the possibility of a Pakistan-based group looking to distract the army by means of another terrorist attack in India.”
- Venezuela “A third time for Mr. Chavez” Hugo Chavez is expected to secure a third term in the October election, and Chavez supporters in the military have said they won’t accept a victory by opposition candidate Henrique Capriles. “We expect domestic political tensions and social conflict to continue to dog the cities in particular; and for the economy’s performance to remain sclerotic and overly dependent on oil.”
- Russia “Plus ca change?” – Without a major external shock for instance a drop in energy prices, Russia is unlikely to push through crucial reforms. But such a shock could cause political instability and investor uncertainty. Civil discontent is expected to rise leading up the 2015 elections.
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