The Week in Hindsight, 08 August 2014
- Equities lower on the week – treasuries, gold and oil move higher; inflows into safe assets
- Russia escalation – troop build-up on the border leads to fears of invasion
- Obama authorises air strikes in Iraq – Pandora’s Box!
- Growth remains uncertain in the Euro-zone, with Italy slipping back into recession during Q2, while the exact economic impact upon the EU of an escalating sanctions war with Russia cannot yet be quantified.
- UK and US economies gather momentum
In short, investor sentiment shifted into risk off mode once again this week, with safe assets outperforming risk, largely on the back of further escalations in both the Iraqi conflict and Russia/West dialogue.
Russia’s retaliation against western sanctions, in the form of its own bans upon the importation of certain foods, has given a clear indication of the likelihood of it making any concessions over Ukraine. Consequently, investors now look to a tightening noose around the rebel resistance in Ukrainian territory for signs of Putin’s next move.
In Iraq, reports that the US government was considering air strikes and drops of humanitarian aid quickly converted to reports that US warplanes had struck targets in the Kurdish regions of Iraq. While these initially provoked a spike in oil prices and weakness across global equity markets, oil benchmarks quickly fell back as traders discounted the likelihood that renewed US involvement in Iraq would disrupt supplies.
Although parallels can be drawn between the actions of the US government in Iraq and those of the international community in Libya, there are distinct differences between the two conflicts. Most notably, the targeted air strikes against Libya in 2011 were intended to topple an incumbent political regime amidst a civil uprising, not an insurgency of religious fundamentalists.
The history of western campaigns in both Iraq and Afghanistan show that such targets can often be more difficult to dislodge. Consequently, we caution that there is a high degree of likelihood that renewed US involvement in Iraq will not be a short or sharp affair, and could instead evolve into a more protracted and drawn out campaign.
As a result, this could now become a recurring concern of investors, most notably those with either a Middle Eastern or oil and resources-focus.
Global Equity Indices Since 29 July 2014
The contents of this report and the Stockatonia website (https://www.stockatonia.co.uk/