The most intriguing and ignored market mover: seeds of rebellion may be sprouting, and a ‘quake’ may be coming – not in the MENA region but in the EU – as Ireland makes a deft thrust at the EU core’s weak spot. Could it shift power towards the PIIGS?
The almost uninterrupted rally that began August 8th was halted during the week of beginning February 20th as the unrest in the MENA region spread to a real oil producer, Libya. Since then, risk assets have finished lower 3 out of the 4 past weeks.
During each of those weeks markets were scared and fixated on a different crisis:
- Week Beginning Feb 20th- Libya & MENA Unrest Causes Spiking oil
- Week Beginning March 6th: EU Crisis Fears Return on Spiking PIIGS Yields
- Week Beginning March 13: Japan quake, tsunami, nuclear
The week ahead of March 14 – 18 begins with all three regional crises threatening to converge and pound risk assets lower. Here they are in brief, and we’ll cover them further below.
Japan: Threat of quakes, radiation hang over Japan & global markets
MENA: West steps into Libya, Saudis Move into Bahrain, Yemen & Syria heat up
- Libya: West begins military strikes but commitment to remove Ghadaffi, a key to ending the Libyan crisis, restoring oil production, remains unclear
- Bahrain: Small Island, Big implications if Saudi – Iran showdown develops
- Elsewhere: Syria & Yemen unrest heats up, Egypt quiet but unresolved
EU: EUR rallies despite real threats to EU bailout plans from Ireland, Germany
- Ireland threatens EU banks with Irish bank defaults – aims for EU’s Achilles heel – will other PIIGS follow Ireland’s lead?
- Germany shows further signs of rejecting expansion of bailout funds needed to prevent PIIGS defaults
Note that while there were potentially very significant developments in the EU and MENA regions, markets moved with developments in this week’s crisis of the week, Japan
The following was covered in greater detail in our prior post: The Great Japanic: Winners, Losers and How to Invest Accordingly. Here’s a summary of how the ongoing Japan crisis could impact markets next week.
The damage to the Japanese and global economy from Japan has not ceased. The coming week bears significant risk of:
- AFTERSHOCKS: In the case of an 8.9 quake, the odds are there will be one aftershock of more than eight on the scale and 10 of more than seven. So far we have only had one that has been more than a seven. Meanwhile, aftershocks are moving toward Tokyo. That could mean more damage to essential infrastructure, more lost production, and more supply chain problems worldwide for those firms supplied by Japan for steel, silicon wafers, iphones, etc. Volvo has already reported that truck production will be hurt.
- RADIATION: Japanese authorities have yet to restore reliable cooling for reactor cores and spend fuel rod pools. Until that happens the risk remains that these active and spent fuel rods could overheat, ignite, and release clouds of radioactive gases similar to what happened in the Chernobyl disaster. The difference here, unfortunately, is that the potential radiation release here is far greater than it was at Chernobyl. See the above article for details. As of late Saturday night GMT the radiation situation remained unresolved.
We’ve discussed these in detail in The Great Japanic: Winners, Losers and How to Invest Accordingly, but here’s the short version.
Despite all that has been written and said, in the end, how Japan influences next week’s markets depends on whether there is more quake or radiation leakage.
If not: bullish for risk assets, if so bearish for them.
For example, more aftershocks and damage would suggest shorting stock indexes and risk currencies. Forex binary option traders or stock index binary option traders would be biased to buying puts on breaks below support levels or failure to break through resistance levels.
Some Longer term implications:
- Loss To GDP: Per a preliminary report from Societe Generale, the worst case cut to Japan’s GDP is 0.3%. See here for details.
- Radiation Damage: If the Fukushima plant experienced a meltdown and explosion the UK’s chief scientific officer John Beddington says damages would be limited to a 30 KM range. Thus major areas like Tokyo would be spared in his worst case scenario.
As with Japan, lots of developments, little additional clarity, remains a potent threat to markets in the coming week.LIBYA: WESTERN INTERVENTION KEEPS UNREST ALIVE, OIL PRODUCTION UNCERTAIN
Last minute western intervention kept the rebellion alive, but far from victory. While it’s clear that the west could force Gadaffi out, it’s not clear that it has the will to do so
Despite acceptance of a UN ceasefire, and Western air & cruise missile attacks to weaken Ghadaffi forces, there have been reports of continued Libyan strikes at rebel positions in Benghazi and elsewhere. We have yet to see commitments of Western troops to Libya, and without boots on the ground it remains unclear if there is enough military opposition to remove Ghadaffi.
Unless negotiations maintain a tight focus on not allowing him the option to stay, the uncertainty regarding oil production could linger as he attempts to delay and ultimately engineer retention of control over at least some of Libya and its oil reserves.Market Ramifications
With Libyan oil already offline, little likely impact on markets until enough calm returns for oil production to return, which would be bullish for risk assets, bearish for oil.BAHRAIN: SMALL ISLAND, BIG IMPLICATIONS IF SAUDI – IRAN SHOWDOWN DEVELOPS
Events of the past week included a crackdown on protestors with the help of Saudi Arabian forces that crossed into Bahrain. The action threatens to escalate the unrest into a regional conflict as Sunni Saudi Arabia seeks to beat back attempts by Shiite Iran’s covert operatives in Bahrain to convert Bahrain into a Shiite State. The majority of Bahrain is Shiite, but it’s ruled by Sunnis.
Thus far Iran’s threats have been only verbal, but if they escalate, the threat of military confrontation between the Saudis and Iranians would obviously be very bearish for risk assets except for oil, which would likely spike on any signs of escalating tensions between these leaders of the Sunni and Shiite camps, which together dominate the Persian Gulf through which flows 40% of global oil supplies.
Market Implications: If this conflict escalates very bullish for oil and thus bearish for other risk assets.
Commodity traders would look to establish new longs in oil with direct purchases of oil or oil futures/options/cfds/ binary option calls
Stock traders: go long oil stocks or oil etfs like USO, USL, and BNL.ELSEWHERE: SYRIA & YEMEN HEAT UP, EGYPT QUIET BUT UNRESOLVED
The past week saw violent suppression of demonstrations in both countries. Neither is a major oil producer, but Yemen abuts Saudi Arabia, and Syria is a prime Iranian vassal, so both nations could see rising tensions that could scare markets and further lift oil prices. No major news out of Egypt, which remains under army control. That’s not what the opposition wants, so the story here is not yet over.
Market Implications: None likely at this time.The EU: Facing Both Rebellions And ‘Earthquakes’
For full details about how the EU faces both rebellions and a financial earthquake, see EU SUMMIT: BOTH QUAKES AND REBELLIONS COULD HIT…THE EU
The quick version:
for the rest of this post see article by same name at: http://globalmarkets.anyoption.com
DISCLOSURE & DISCLAIMER: AUTHOR SHORT EUR, NO OTHER POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER