It’s Murphy’s Law at its best: Anything that can go wrong, will go wrong. That’s exactly what is happening across the world, with social tensions across the region, the triple-whammy of earthquake-tsunami-nuclear meltdown in Japan, a civil war in Libya, soaring commodity and food prices, and more – and it’s doing the financial markets and investor sentiment no favours.
And to think of it, we haven’t yet ended the first quarter of the year 2011. Here is a take on the five economic disasters that have the potential to rock the just-stabilising boat that is the global financial markets.
#1 War in Libya
From imposing a ‘no-fly zone’ over Libya, NATO forces seem determined to move on to further aggression, as is obvious by the last couple of days’ developments, with reports of Libyan tank columns being assaulted and an air strike on Muammar Gaddafi’s personal compound in Tripoli.
Already, the Arab League, India, China and Russia have objected to how this operation is being carried out and they are alarmed about the reports of civilian casualties. This means only one thing – further tensions around the world, which obviously isn’t a positive for the financial markets.
#2 Rising regional turmoil and oil prices
When Mohamed Bouazizi, a Tunisian street vendor, set himself on fire on December 17, 2010, not many expected it to spark off what is being branded as The Arab Spring, something that has already seen regime changes in two countries – Tunisia and Egypt – and have impacted many others in the region, including Algeria, Bahrain, Oman, Syria, Yemen and others.
Yet, that’s exactly what happened, and as long as there remains chaos in the Middle East, the price of oil will include a higher ‘risk premium.’ Almost every analyst worth his salt agrees that a soaring oil price – anything above $140/b – will push the world off the recovery cliff and into the double-dip abyss. And oil prices are showing no signs of cooling off in the near term – which again isn’t good news for the global financial markets.
#3 The Japanese triple disaster
When a major disaster strikes at the world’s third largest economy, nobody should expect anything less than a global impact. And there were three mishaps in tandem in Japan – an earthquake that led to a tsunami, which has now resulted in a nuclear breakdown and potential meltdown
There is no doubt that, however resilient, the Japanese economy is going to be crippled for an extended period of time. This morning, Moody’s Investors Service said in a special report on the situation in Japan that the downside risks from the earthquake, tsunami, and nuclear crisis have increased over the past week for the country's economy, sovereign credit, banking, insurance, and non-financial corporate sectors.
But it is not just Japan’s economy that has been deeply affected by this tragedy. The Moody’s report also examines the effects of the situation on a host of sectors, including assessments of the supply chain impacts, such as for the US auto sector, and US and Asian electronics sector. Auto and electronics dealers here in the UAE have acknowledged that even though it’s too soon to assess how much, there will indeed be an impact on shipment and sales of Japanese products in the country.
Many countries across the world, including the UAE, are already checking Japanese imports for radiations, and if these were to be found in any reasonable amounts, global trade would be impacted hugely, as Japan is a major exporter of not just food items such as sushi, but also auto and electronic goods.
At the same time, Japan is also a major importer of stuff from across the world, and even if no major radiation is detected, at least for a few more weeks, both imports and exports will be significantly down – which is bad news for the financial markets.
#4 Food inflation
A number of people believe that rising food price has been a major factor in sparking the turmoil in Africa and the Middle East. According to the UN, the global price of food hit a new all-time high earlier this year, and the agency is expecting the price of food to continue to go up throughout the rest of this year. When people don’t have enough money to put food on the table, don’t expect the financial markets to perform well – at all.
#5 The death of the dollar
It’s been sick for a while now, and one of the life-supports – Japanese liquidity, which was still lapping up US government debt – has been taken off after the Japanese tsunami.
Japan was the second-largest foreign buyer of US Treasuries last year, and it’ll be safe to assume that as it begins the painstaking process of picking up the debris and rebuilding its economy, Japan will not end up buying too much of the US debt this year.
Besides Japan, a number of big funds such as PIMCO have announced that they will be stepping away from US Treasuries this year. But America still needs trillions of dollars this year alone to roll over existing debt and to finance new debt. As the Federal Reserve prints more dollars and dilutes the greenback, in effect pushing up commodity prices further, the world will accelerate its search for an alternative currency.
Will it happen this year? Perhaps no, maybe not in the next five years, but it could happen. And even a reasonable doubt of the event happening will push the world’s financial markets further towards disaster.
At the end of the day, the financial markets are resilient, and have weathered crisis after crisis in the past. They have definitely overcome events of such magnitude in the past, but taken collectively and happening in tandem, these are huge challenges facing the financial markets, and 2011 is in serious contention to join 2009 and 2010 as another lost year.
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