The Week In Hindsight; 13 June 2014

An escalation of violence in Iraq and a raft of poor economic numbers helped to push European indices lower throughout the week as traders and investors sought safe haven assets over risk instruments.

The headline economic numbers for the week saw German wholesale prices and final CPI revert to negative, stoking yet further fears over inflation. This was while French payrolls and CPI inflation figures both also contracted throughout the previous month.

Despite the poor data and that a number of key releases are due next week, we expect the key drivers of developed market equity indices over the days ahead to be the evolving crisis in Iraq and the US FOMC statement and press conference.

In short, momentum behind the UK, US and European economies has been lacklustre over recent weeks. Given the risks presented to the recovery by various geopolitical conflicts and hotspots of civil unrest, it is possible that US policy makers will adopt a more cautious tone at next week’s FOMC meeting.

Should such caution lead to a slowdown in the tapering process then the outcome for global indices would, in theory, be positive. Nevertheless, the path of events in Iraq is uncertain and a serious or protracted escalation could harm global investor confidence, potentially leading to increased downward pressure upon  equity markets.

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Iraq Comment

Reports from the latter half of the week suggest a Sunni Islamic sect from the north of the country has mobilised a brigade of militants and, at first glance, attempted to take the country. The uprising has, so far, led to the capture of an escalating number of arterial cities while several key oil refineries are also believed to have been seized.

Information reported via both Bloomberg and Reuters on Thursday afternoon indicated that the militant forces were, at the time, advancing toward the capital Baghdad with the intention of seizing it.

The unrest has prompted Shi’ite militias to mobilise outside of Baghdad, after government forces abandoned their posts, with the intention of defending the city. In response to the conflict, Barack Obama has publicly pledged his support for the Iraqi government and in a statement released on Thursday evening, also alluded to the possibility that the United States could intervene in militarily in order to preserve Iraqi democratic integrity.

Going forward, our base case scenario sees the potential outcome from this being increased levels of violence and disruption at the national level, with a moderate to high degree of risk that this evolves into some form of civil war.

On a worst case scenario basis, a protracted civil conflict evolves, oil output (economy) is severely disrupted and the international community is drawn into providing military support to the government and Shi’ite militias.

EU Indices

EU INDICES