Butterfly Effect

25/02/2011 at 3:19 pm 1 comment

On 17 December last year, a 26-year-old Tunisian street vendor set himself on fire after local officials made it impossible for him to do business. A little more than two months later, and the series of events set off by this incident has seen the governments of Tunisia and Egypt fall, Libya beset by civil war, and almost every other Arab regime throwing money at its people to forfend a similar fate. Never has the phrase “chaos effect” seemed more appropriate.

It is too early to tell which Arab governments will survive, let alone what exactly might replace the ones which fall. Perhaps there will be a flourishing of constitutional democracy, with free elections, separation of powers, bills of rights – the complete apparatus of western liberty. Or perhaps the stage is set for a narrow, repressive theocracy which will see the pyramids destroyed for being un-Islamic.

So what has all this geopolitical uncertainty meant for markets?

Equities have mostly enjoyed a solid start to the year, especially in Europe (the exception being here in the UK). Bond markets have not done so well, with yields higher pretty much everywhere. While the political situation has made them nervous, therefore, these markets as a whole have reflected the continued entrenchment of the global economic recovery.

The commodity space has been impacted more directly and dramatically. Oil in particular is up, with the near Brent future almost $20 higher year to date. Governments, mindful that food price inflation was one cause of the Arab uprisings, have stocked up on wheat and rice, driving prices up for a time, but they have just fallen back again on fears that more expensive oil will dampen growth and demand in key markets.

By and large, however, financial markets are looking through the political turmoil. The butterfly effect has yet to play itself out in north Africa and the Middle East, but elsewhere the bulls and bears remain in control.

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Taking Away The Punch Bowl Words, Words, Words

1 Comment

  • 1. Tragic Echo « The Blog @ Vigilant Financial  |  18/03/2011 at 3:53 pm

    […] events in the Arab countries to consider as well, 2011 has got off to a convulsive start. Let us hope that Japan and the rest of the world may now […]

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