19 September 2019

Beware of the unexpected

The drone strike on Saudi oil facilities and subsequent wild fluctuations in the oil price served as a timely reminder that geo-political risks remain as a potential upset to sentiment.

As it happens, this particular oil shock seems to be relatively short lived, with the price settling down to close to the pre-strike level. Still, it does mean that trade is not the only game in town when it comes to trying to determine which factors will govern market performance.

Once again, the central banks are making much of the running when it comes to positive action. The Fed’s decision to lop a further 25 basis points from the funds rate target hardly came as a surprise and may see the last of this particular round of monetary easing. This view is reinforced by the news that the Federal Open Markets Committee, their equivalent of our own Bank of England’s Monetary Policy Committee which sets interest rates, actually raised its forecast for economic growth in the US.

Other central banks seem content to sit on their hands for the time being, with the jury still out on how far the global economic slowdown might travel. China does appear to be priming the pumps for heading off any further drop in GDP growth and at least the talks with America on resolving the trade war continue. But in the background plenty of unknowns lurk, like how do we control unnecessary consumption, what is the future for the global car industry and is there a solution to mounting contamination of our world by plastics.

 But the situation in the Middle East is a real concern, with little prospect at present of any resolution to the many dangerous pressure points that threaten to disturb global peace. No doubt President Trump has no wish to appear an appeaser, as his predecessor President Obama was viewed, but nor will he wish to precipitate a conflict that could well extend into the wider world. As the new Saudi ambassador to the Court of St James said in a recent interview, it is the whole world that is threatened when actions like the drone strike take place.

Markets, on the other hand, have proved remarkably sanguine, preferring to ignore heightened tension in the region. In a way this is understandable. For a start the options do not appear outstandingly attractive, with cash and government bonds offering measly returns. True, gold has enjoyed something of a resurgence in interest, but it doesn’t feel quite the hedge it once was. And sterling has bounced back, though this has more to do with Boris painting himself into a corner than anything. These are difficult times, but it will be the unexpected that changes sentiment – and it could be for the better.

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