Geopolitical risks have become a must watch for financial markets. Alastair Newton, Nomura's senior political analyst is out with his latest 'Issues which keep me awake at night' mid-year review.
Earlier this week we wrote about the 14 other countries that are crucial to financial markets. Here though we look at the 4 biggest risks which according to Newton include Europe, the U.S., Oil and China.
While some of these risks seem to have waned, it is quite likely that they will return as key issues by the end of the year.
The EU is at a crossroads despite the European Council meeting, Spain and Italy pose bigger risks than Greece right now
Europe is at a critical crossroads in the aftermath of the European Council meeting. Germany's desire to balance additional liabilities with a move towards a fiscal union will be opposed by France and others.
Many of these differences are unlikely to be resolved given the German constitutional court's decision to stay the ratification of the fiscal compact and European Stability Mechanism. For now most of the heavy lifting in the short to medium term will still come from the ECB.
While a Greek exit from the eurozone is a real risk at the end of the year, the bigger threat to the euro right now comes from Spain and Italy where early elections are quite likely.
Source: Nomura
The fiscal cliff will continues to be the biggest concern for the U.S. irrespective of the outcome of the presidential election
In the U.S. attention is focused on the elections which are being viewed as the Republicans 'Reclaiming America' or President Obama's 'Reclaiming American Values'.
Romney's campaign has gained momentum and Republicans are expected to retain a reduced majority in the House; but the positioning of the Senate looks too close to call.
Irrespective of the election outcome though, the post-election period will be dominated by "protracted and difficult negotiations aimed at reaching agreement on a range of fiscal issues and raising the debt ceiling:" A failure to reach agreement by the year-end would cause a significant fiscal 'hit' to the economy from January 1, 2013.
Source: Nomura
Oil prices are decreasing on a perceived decline in geopolitical risks but they could return before the year-end
Brent prices have fallen significantly in the past three months on a perceived drop in geopolitical risks to oil supply. This is in large part because Iran has returned to the negotiating table in the p5+1 process along with the addition of Kadima to the ruling-coalition in Israel has eased concerns of a military strike on Iran.
Any further declines since have been because of concerns of a slowdown in Europe and the U.S.. With the P5+1 talks continuing in July, political risk premium is minimal for now.
Source: Nomura
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