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Fort Financial Services - EN

Monday, 10 April 2017

Political risk in all fronts

Posted by Fort Financial Services at 12:00 Labels: fundamental review

It’s everywhere. Political risk has taken over our macroeconomic agenda and it’s clearly affecting the way financial markets move. But let’s focus on what’s right now a top priority. In our opinion, there are 2 key events that would shape trading in the near future:

Syria War:
President Donald Trump ordered US military to launch 59 Tomahawk missiles against a Syrian airbase last week. This decision is seen as a response to Bashar Al-Assad recent chemical attack in the Idlib province, which according to Trump “it crossed many, many lines”.
Confusing? Yes, a bit. Donald Trump not one time said that under his leadership, the country will stop putting its nose on foreign affairs to push its democratic values. But the recent attack shows a different picture, especially if to consider that Secretary of State Rex Tillerson is looking forward to convincing Russia, Assad’s key supporter, to turn against the authoritarian regime.
"I'm hopeful that we can have constructive talks with the Russian government, with Foreign Minister Lavrov and have Russia be supportive of a process that will lead to a stable Syria," said Tillerson ahead of a bilateral meeting scheduled on April 12.
How to trade this? Keep your eyes wide open and wait for the meeting. A further escalation in tensions will have a similar effect than the US attack last week. Stronger commodity prices, including gold as a safe haven and crude oil due to possible output disruptions. As for currencies, the Japanese yen and the US dollar are seen as safe havens, which are expected to increase along with uncertainty. If Washington and Moscow find common ground to approach the Syrian matter, we can see a reverse effect, but equities might benefit from such situation.

North Korea:
Remember about those missile tests launched by Kim Jong-un almost every week? Right, those! Well.. It seems Trump has no intention to just sit and wait. Apart from Syria, the US navy is now heading near the Asian nation to displays its full power and send a clear message: no more games, no more threats. Trump sent an aircraft carrier to the western Pacific Ocean in order to respond to any missiles fired by Pyongyang.
How to trade this? You could think about it as Syria Number 2, although Russia is not so deeply involved on this issue. In case of US military taking serious actions, you might want to go long on gold and the yen. China is also expected to jump in on this conflict, so careful with the yuan. As for Trump, taking actions against these countries is also sending a political message to investors: I make things happen. An important message to reinforce trust after the healthcare failure and as the tax reform will possibly take longer to be approved by Congress.

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