World Week Ahead: Unrest fuels a rethink

World Week Ahead: Unrest fuels a rethink

By Timothy Moore

(BusinessDesk) February 7 - The initial euphoria, or panic depending where one stands, about the political unrest sweeping North Africa and the Middle East has subsided. That’s not good news.

Uncertainty is no one’s friend.

Equities appear set to drift for some time. Why? On the geopolitical front, both the governing powers and the opposition in Libya, Yemen, Iran, Bahrain and Saudi Arabia are becoming more entrenched. There will be continued and perhaps extended stand offs. In Libya, the fighting is intensifying.

“There’s no clear solution in the foreseeable future,” Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania, told Bloomberg.

Even in Egypt, where the military has assumed a more direct role in the nation’s day to day affairs, the way forward is unclear.

For equity investors in Europe and the U.S., the focus is on how the surge in the price of oil will impact consumers. Later this week, the U.S. will provide the latest data on consumer confidence and retail sales. And in the U.K., the Bank of England’s policy committee will meet, with expectations of a May rate rise as a backdrop.

Last week’s February U.S. payrolls report offered fresh confirmation that the labour market in the world’s biggest economy was improving but it wasn’t a game changer. The U.S. economy is gathering pace, albeit slowly. And yet the budget debate and Fed Chairman Ben Bernanke’s dovish comments are checking optimism.

"We are in such a sentiment-driven market right now," Michael James, senior trader at Wedbush Morgan in Los Angeles, told Reuters.

It’s not just a London or a New York phenomenon. On the weekend, shares in Saudi jumped more than 8 per cent. Shares in Dubai were higher too. The catalyst was the Saudi government saying its pension fund was a big buyer of shares after their recent drop.

Underlying all that’s happening at the moment clearly is the price of oil. On Friday, it reached a 29-month high and prices have begun to spike at pumps in neighbourhoods around the world, with concerns about how consumers will respond. A key tipping point for oil this week will be the potential for unrest in Saudi.

Activists in Saudi are calling for protests this week which has led the government to say it won’t tolerate any dissent, saying demonstrations would violate Islamic law. Saudi has tried to assuage fears about oil supplies and the Obama administration is now seriously discussing tapping its oil reserves to contain prices ahead of the northern hemisphere driving season.

Aside from some corporate news as of yet unknown, the counter focus is the U.S. economy. This week February’s report is scheduled for release on Friday and economists expect a 1% gain, the best in four months.

Separately, there will be a U.S. trade report, wholesale inventories and the Reuters/University of Michigan preliminary index of consumer confidence for March.

Consumers and investors are starting to show signs of wariness about what lies ahead. The VIX, or Chicago Board of Trade Volatility Index, is trending higher even though it remains historically low. If consumer sentiment is dented, all bets are off and the correction in equities could follow swiftly. That’s the downside of sentiment-driven markets, they can rise or fall with great speed.

(BusinessDesk)

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