Investors seem to be living in a world that is much more stable, politically, than the real one. Late last week, America's S&P 500 index hit a new intra-day record and European equities posted their first weekly rise ina month.
Markets shruggedoff the Ukraine crisis andJanet Yellen's debut. Trading was choppy early this week, but optimism still prevails.
This resilience is starting to look complacent, says Nicholas Spiro of Spiro Sovereign Strategy."No sooner does a risk event emergethan markets brush it off after a brief period of nervousness." Yet, while markets cling to their "glass-half-full view", the "half-empty part is becoming more and more difficult to ignore".
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Historically low interest rates and money printing are key reasons for this.China's attempt to tame the credit boom and the slowdown in major emerging markets are also nothing new. But a more recent phenomenon is that equities appear to be pricing in a great deal of political stability, even though there is less and less of it about.
As Mohamed El-Erian notes in the FT, markets rapidly overcame jitters over Iran, Syria and North Korea, and more recently they have been "similarly relaxed about the Turkish government's tensions, Venezuela's volatile situation and Thailand's struggles fully to restore socio-political calm". Each geopolitical shock has been relatively small, but in total they are beginning to undermine more and more of the global economy.
The Ukraine crisis could lead to a global recession and financial turmoil, says El-Erian. If Russia invades the rest of Ukraine, it would trigger much tighter financial and economic sanctions by the West. Russia could well retaliate by cutting off energy supplies. This may not be the most likely scenario, but it is a "notable risk".
Markets certainly don't have an unblemished track record when it comes to pricing in political risk, as Gluskin Sheff's David Rosenberg points out.
When Hitler invaded Austria and Czechoslovakia in the spring of 1938,the Dow Jones index slipped to 113 by April, down from 126 in February.But by November the Dow was back to 152, because investors reckoned the crisis was over. The market's response was "no different to today's calm".
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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