Tuesday, August 14, 2012

The unexpected

The unexpected.
High summer. Although trading volumes are low markets seem happy enough. Oil prices have stabilized. The threat of a 'fiscal cliff ' seems to be receding and housing starts are up 25% y-o-y. Mr.Draghi's promise to do ' what it takes ' to save the € has removed some of the ' end of the world as we know it 'nervousness that characterised much of Q2 trading.

We however are concerned about two issues that are currently off the radar but may well be soon on it..

The Mid-East. 
The Syrian civil war continues. Turkey, the Gulf States , the Lebanon and Iran are all being drawn further and further into it. The Kurds are also becoming involved.  Stinger missiles and T-62 tanks have found their way to the rebels in Aleppo. Rumours that Saudi Arabia's new intelligence chief Prince Bandar has been assassinated by Syrian agents continues to swirl through the Riyadh exchange. Israel seems to be ever more insistent that action must be taken against Tehran and its nuclear pretensions. Domestic reports say that the Defence Minister Barack believes the government should act in the runup to the US Presidential elections. Egypts new fundamentalist President has fired the two most pro-western military leaders. Russia wants to evacuate its citizens from Syria but doesn't have the physical means to do so. Unrest has flared up in Saudis eastern province. Libya remains unstable. Taking all this together is there a chance of an oil price shock ? Something is stirring across the whole region.

It's not ( in our view ) Spain or Portugal or Greece or Ireland that will spook markets. It's Italy that presents the major threat to the Eurozone. Former Prime Minister Berlusconi is making plans to stage a comeback. He understands that the easiest option for Italian industry is to restore competiveness through a major devaluation. Hence the accelerating capital flight out of the country. Italian GDP at the end of Q2 was at the same level as it was at the same time in 2003. By year end it is likely to be on a par with the GDP level recorded at year end 2000. A lost 12 years! If the downturn in the economy continues ( as is probable ) then Italy could soon be back GDP levels last seen in  1997. With interest rates rising, GDP falling, and inflation remaining low there is ample scope for an 'Italian surprise '.

Enjoy August. September will soon be here and with it a raft of undiscounted conundrums for the market.