Geopolitical concerns after tragic events

Writing yesterday, we said one of the fears uppermost in investor’s minds regarding asset prices was geopolitical risk. According to the Merrill Lynch fund manager survey, on Thursday saw the reason why. The tragic events in Ukraine that saw the downing of a Malaysian Airline along with the Israeli ground invasion on the Gaza strip led to a sharp sell down in risk assets. Much has been made recently of the Vix and the fact it has been trading at multi-year lows, we refer to it often in this blog, today it climbed 36% to finish close to 15 points.  

We also pointed out yesterday that the Merrill Lynch fund manager survey indicated that the asset allocation of equities to bonds was at multi-year highs, for those who like a contrarian trade this would suggest being long bonds for the coming weeks might be worthwhile. On Thursday whilst equities suffered, bond investors once again benefitted as UK 10-year gilt yields fell to 2.58% and US treasury yields fell to 2.45%. As investors look to buy treasuries they need US dollars to pay for them, and recently the US dollar has been rising but remains within its 6 month trading range. 

When geopolitical tensions increase one also looks for the reaction from the oil price, Brent crude has recently fallen from $114 a barrel to $105 at the start of the week, Thursday’s events saw the Brent crude oil price rise to $108. 

Geopolitical risks and their effects on risk assets can often be short lived as was the case with the Ukraine earlier in the year, as investors recover from the initial shock and politicians look to calm the situation. The summer can often be a time when risk assets suffer volatility as traders and money managers have pared back positions during the holiday period. It may be that this summer is going to follow in line with the events of the past few years as geopolitical concerns remain uppermost in investor’s minds. 

One event we always watch out for during the earnings season is the report from General Electric. As much as Alcoa is seen as setting the tone for the earnings season ahead, due to its diverse business interests GE to our mind is a window on the global economy. Unlike the US stock market GE’s share price has fallen so far this year, as always it will be interesting to hear its views on the strength of the recovery.

Posted on July 18, 2014 .