Isn’t summer supposed to be the time when life slows down and the world takes a vacation?
That may be the case for some of us, but the despots of the world are working overtime. Consider just a few of the world crises taking place this summer:
- Russia’s conflict with Ukraine continues. The downing of Malaysian Airlines Flight 17 by pro-Russian rebels has done little to stop it.
- Hamas is fighting with Israel over Gaza. A cease fire is in place, but Hamas has shown little respect for previous cease fires and it is unlikely that this crisis has ended.
- Muslim terrorists known as ISIS are making inroads in Iraq. It’s reached the point where President Obama has reversed his policy and announced that U.S. military airstrikes will take place “if necessary.”
- Syrian leader Bashar al-Assad continues to slaughter his people, while the country’s conflict threatens to spill over into Lebanon.
- The newly inaugurated Libyan parliament has called for a cease fire and threatened to act against warring militias that continue fighting.
- Al-Qaeda-linked sect Boko Haram continues to hold more than 200 schoolgirls captive in Nigeria.
- Iran is developing nuclear weapons, although the U.S. State Department said U.S. and Iranian officials had a “constructive discussion” this week about Iran’s nuclear program. There’s some conjecture that, even if Iran were to agree to halt its nuclear development program, it could outsource the program to North Korea.
Gaza today.
Remember the end of the Cold War, the resulting “peace dividend” and the economic growth of the ’90s? Remember life before the financial crisis? Much has happened since then and most of it has not been good.
Market Impact
During normal times, Russia invading a foreign country or fighting in the Middle East would cause stock prices to fall.
But these aren’t normal times and, until recently, the market has shrugged off one crisis after another. It may be that investors didn’t perceive the crises as being too significant, or that they wanted to see how the crises evolved before taking action. Or it may be that the Federal Reserve Board’s quantitative easing limited investors’ options, so they stayed in the stock market.
It may also be that financial crises throughout the world demanded so much attention that investors were able to ignore the geopolitical crises.
Now, though, geopolitics appears to be threatening markets in both the U.S. and Europe.
As CNBC reported, “Stocks wobbled Thursday, but took clear hits after several headlines, including reports that the U.S. was weighing airstrikes and humanitarian aid to help Iraqis trapped on a mountaintop by rebels. Bonds rallied, the euro slid against the dollar and gold firmed.”
And then: “After trading lower overnight, stock futures turned higher in the 7 a.m. ET hour, after a news report quoting a Russian official saying Russia is seeking to de-escalate the Ukraine conflict. European stock markets came off their lows.”
European Central Bank President Mario Draghi said this week that, “Heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively. … There is no doubt that if you look at the world today, you’ll see that geopolitical risks have increased all over the world: we have the Russian-Ukrainian crisis, Iraq, Gaza, Syria, and Libya. And some of them, like the situation in Ukraine and Russia, will have a greater impact on the euro area than they certainly have on other parts of the world.”
Draghi added that the ECB will take action, including quantitative easing if necessary, to stabilize Europe’s economy. Europe may be buying bonds as the U.S. halts its bond buying.
Clearly, the world is a dangerous place – and investors are finding that they aren’t immune to its dangers.
How these crises play out – particularly U.S. involvement in Iraq and Russia’s actions in Ukraine – will likely play an important role in the direction of the stock market during coming weeks.
At least the Fed’s no longer in charge.