Saturday, Mar 22, 2014

For the past five years the world has lived through extraordinary economic and financial times, whose ramifications clearly are not over, across many horizons.

While a sense of muddling through has arisen in the benchmark that is the US, boosting stocks to record levels, nevertheless China’s condition seems increasingly in doubt, Europe remains unconvincing in its recovery, and Japan appears to be struggling to deliver on its promise of programme-inspired acceleration.

Thus, international bond markets have been either distorted by central bank interventions or moderated in their movements by an overwhelming uncertainty about the rebound. Meanwhile, emerging markets have been caught in a maelstrom of various, indeterminate forces driving expectations.

In the midst of this rather confusing picture for investors comes a geopolitical event that would and should be shocking, if not for the incapacities already well known of policymakers in the West.

We can probably all ascribe ideas to how the US and Europe in particular have been preoccupied with domestic indulgences rather than strategic, foreign interests, resulting partly from financial weakness as well as overseas misadventures that have drained confidence as well as resources.

Russia’s effective usurping of the Crimea from Ukraine without hardly having to fire a shot is a coup as dramatic as its implementation was strangely matter-of-fact. So much so that international investors have been comparatively sanguine in their response, ironically reassured by the relative pacificism of the global reaction.

Coffers

For Gulf observers there is naturally a special interest in how key markets — those that might be viewed either as critical to the region’s coffers or reservoirs for safe-keeping of wealth — may behave in a twilight world of diplomatic outrage but (effectively) acquiescence in the fait accompli of this triumphal, historic landgrab.

What, then, to make of the prospects for oil, the dollar and gold in this environment? Is the currently phony war meaningless for investors, while it’s subdued, or is the unnatural limbo liable to crack and apply pressure upon recent norms?

As to oil, the market has been remarkably unperturbed by the turn of events. Take, for instance, Standard Chartered’s latest assessment. “Oil prices have shown a marked lack of volatility, even when judged against the calm conditions of the current decade’s long sideways drift in prices. We expect volatility to increase, as the current compressed level appears inconsistent with falling inventories, limited global spare capacity and an escalation in the number and connectedness of geopolitical risks.” That quick reference to what has been headline news recently comes conspicuously only third in the list.

Equally, it’s worth remembering that scenarios and trends for these key variables are somewhat inter-related, with oil especially habitually priced in dollars.

Market analysis and trading platform Forex.com, viewing these series collectively from both a fundamental and technical perspective, indicates that the market pause may only be momentary.

Analyst Fawad Razaqzadal says, “Fears over [the] troubles in Ukraine have receded in recent days, [and] gold and Brent crude oil prices have correspondingly fallen. However, should the West increase sanctions on Russia — especially … punishments such as a limitation on energy exports — then oil prices are likely to spike higher.”

Energy receipts

Thus, there is reason to believe a certain danger lurks for the world economy and markets, albeit one that ironically, if it generated enhanced energy receipts, would aid Russia itself, which instead might only be influenced by a concerted drop in prices, that would have to be orchestrated, with the assistance of Gulf producers.

“Crude seems like it has decoupled with the US dollar and has become more responsive to actual supply and demand factors,” Razaqzadal continues, while gold “remains inversely correlated with the greenback”.

“There have been times when both assets have moved in the same direction,” he confirms, but evidently for the moment these indicators are not behaving in equal measure as a safe haven, and are therefore indicative of a lack of panic.

All in all, it would seem that it’s not — arguably — the underlying importance of news that moves the markets so much as the sense of drama; and Ukraine’s dissection, at the frontier of East and West, and reviving concerns of the Cold War, has been so quietly administered that, for the moment at least, it appears barely to amount to a hill of beans to most investors.

That said, the realist will point out that the Middle East has been roiled by regionalised issues of conflict and concern for many, many years, but oil still flows, the world economy has to keep functioning, and business is business.

Moreover, it’s uncertainty that markets really don’t like, and it seems fairly certain that the rest of the world won’t be stirring itself too much over Russia’s manoeuvre. Incrementally, though, a ratcheting of tensions still has the scope to spark a breakout of volatility.

By Andrew Shouler Financial Correspondent

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