WORLD VIEW: Geopolitical signals may be worrying, but global equities are largely blind to them

By Sitaraman Shankar

Sitaraman Shankar

Moneycontrol News

* The headlines in recent weeks reflect alarming geopolitical trends that should have worried equities * But global equities are strong, gold - a safe haven - is hovering near multi-week lows even if oil - a measure of economic growth - has come off

* Any ructions next week from the situation in Catalonia on European markets could be short-term

Just over a year after the British opted to leave the EU, global markets are contending with two more secessions: Catalonia, home to Barcelona (and its storied football team) wants to leave Spain, and the Kurds want to leave Iraq. The Catalonian move, at least in some eyes, opens the door to the disintegration of several European countries, sent a shudder down the euro’s otherwise robust spine. Oil prices ticked up sharply immediately after the Kurds voted with their feet in the last week of September.

Consider this somewhat alarming map that shows active secessionist movements across Europe. Think of the number of additional visas that Indian passport holders would need if all this came to pass.

If that’s not enough, markets should also be worried about two individuals with funny hairstyles who both have a penchant for shooting from the hip. North Korea’s Kim Jong un and US President Donald Trump kept the world on edge through September, their intemperate statements invoking the real prospect of annihilation for large swathes of humanity.

In recent years, global markets have reacted to a subprime crisis and the collapse of large banks. Now the focus is — or should be — strongly on geopolitics.

But beyond the headlines, is that really the case? For all that, global equities are in rude health, paying more attention to positive macro data coming out of the United States and Europe. Through September, when fears over North Korea were at a peak, the MSCI global index ticked up 1.7 percent, part of a 16-percent rise so far this year.

“Economic figures have been so strong — we can call it an economic steamroller — that they are able to make geopolitical worries look like they are simply not there, even though we all know that they are,” Philippe Gijsels, Chief Strategist at BNP Paribas in Brussels told Moneycontrol in an email interview. “Nobody wants to get in front of this steamroller and tries to jump the bandwagon instead with the traditionally stronger months of the year in terms of equity returns not too far away.”

Gijsels noted that Chinese economic figures were stronger than expected, the confidence of large Japanese companies were at 10-year highs, figures measuring the US economy were at levels not seen in decades and that 2017 looked like being the first year in seven when all major regions reported higher earnings.

Gold, which should have been rising if investors were really nervous, is at a two-month low. It has fallen some $80 per ounce over the past month, suggesting no real impact from geopolitical ructions.

The fall in the price of gold is despite a weak dollar, which has taken a beating over signs that the Trump administration cannot get business done. The dollar is down 10 percent year to date against the euro, suddenly everyone’s favourite currency, Catalonia or no Catalonia. The euro’s strength should begin to hit European exporters, especially German ones, if it continues. Ironically, Germany is entering a period of some uncertainty with a less-than-convincing re-election of Angela Merkel’s government. But the German economy, like the cars it produces, has a finely tuned engine and will probably purr along nicely.

After a brief rally, oil has come off to levels around $56 a barrel, suggesting that the growth signs that equities investors are seeing are still not strong enough to fuel a sustained surge in crude. Indeed, Brent is more or less flat on the year after hitting a peak of $59 around the time of the Kurdistan vote and a Turkish threat to cut off Kurdish oil shipments. The oil price, of course, is also driven by oversupply and the marginal cost price of American shale.

So gold tells you that markets are largely ignoring the geopolitical headlines, and oil tells you that equities may be slightly overestimating a demand recovery on the ground. Which leaves global shares nicely poised, with risks on the upside, as central bankers would say.

The situation in Catalonia could reach flashpoint in a couple of days, with a court forbidding the Catalan parliament from meeting. If the Catalan lawmakers ignore the ruling and meet to declare independence,  their leader Carles Puidgemont may be arrested and violence may ensues; expect some reaction on Spanish shares and bonds, and on the euro. But that could all be washed away by more positive data from across the world.

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