Ongoing turmoil in Middle East won’t have sustained impact on markets: Alastair Newton, Nomura

In a chat with ET Now, Alastair Newton, Senior Political Analyst, Nomura, talks about the global markets and possible oil price fluctuations in the backdrop of the US assault on the Islamic State militants. Excerpts:

ET Now: Emerging markets have been jittery ever since the US struck Syria. How do you see this panning out? Can we see more nervousness ahead?

Alastair Newton: I doubt that we are going to see sustained nervousness over the US coalition. Markets will get used to this quite soon, unless there are some significant elements of a Mission Creep. That is why we have already seen Mission Creep on behalf of the US relative to where Obama started back in June.

Given what I personally see as a degree of un-deliverability over Obama’s aim of destroying IS from the air — even with support from others on the ground — we may well yet see more drift in that direction. But if we consider the price of Brent today, it is clear that markets are not actually too concerned about what is going on in that region at the moment.

ET Now: Historically, geopolitical risks have impacted markets through one of two transmission mechanisms, a growth shock or an oil price shock, or both, for that matter. Now oil prices have been languishing below $100 to a barrel. Do you see that moving?

Alastair Newton: Assuming we do get a day with the Iranians, then my base case is still that we probably will. However, it may be 60%-40% probability given pressures in the opposite direction in both Tehran and perhaps even more in Washington.

I would expect to see — all other things being equal on the supply side — further softening of the price of Brent, if that does actually go through. If it does not, then I would expect to see Brent going up again.

Let’s keep in mind that the deadline of November 19 falls just six weeks before the end of the year. The start of the year — the period from January to April — is broadly seen as being the best time for military operations in the Gulf in terms of weather conditions.

A couple of years back in 2012, we saw Brent get to $128 a barrel in the middle of that window because of concerns that Israel would launch an imminent attack against Iran. Now I am not going to suggest $128, but I certainly think we could see Brent back towards the top end of the $105 to $120 range, which has remained the predominant range for Brent over the past three-and-a-half years since the civil war broke out in Libya.

ET Now: You had predicted that in Q4 and beyond we would see less benign monetary conditions underpinning increased volatility around political events. What about Fed? If indeed they do tighten sometime in the next six months, do you see more trouble for global financial markets?

Alastair Newton: It is more than a question of whether the Fed is going to tighten. Clearly, the next move by the Fed is highly likely to be tightening. The big question is the degree of uncertainty which the markets are now facing on the timing and magnitude of the Fed’s next move.

Up till now this year, the Fed’s conduct has been entirely predictable. The Fed said what it was going to do towards the end of last year on tapering and it has done exactly what it said it was going to do.

As of now, we have a much lesser degree of certainty over the exact trajectory of monetary policy in the US. We also have a significant degree of uncertainty over monetary policy in China. We have also been seeing for the last couple of years alternating strategies followed by China — six months of stimulus aimed at sustaining growth, followed by periods where it has been looking to crack down on the shadow banking sector, squeezing credit out of the system in the process.

We also have uncertainty regarding monetary policy in the Eurozone. Are we going to see the ECB actually being able to execute quantitative easing, or are we going to see something else? Then of course the UK — though it is relatively small compared to those three economies — is likely to be moving back into tightening mode sometime in the foreseeable future.

Now we have enjoyed excessively loose monetary policy for six years since the demise of Lehman Brothers. It cannot last. It does change the climate for investors and it is likely to mean that you are going to see markets reacting with greater volatility in the face of political risk. That is what my view is.

ET Now: India and China have been having some border issues. Do you see those being resolved?

Alastair Newton: The India-China border issue goes back a very long time. I recall that it was in 1996 initially that China and India agreed that they were going to resolve the border issue. There have been numerous statements of similar commitments since then.

I remember Hu Jintao coming out with such a statement on a state visit to India. At the start of the term of office of the current Chinese leadership we saw similar commitment from Keqiang visiting India. We have seen statements from Xi Jingping where he wishes to resolve the border dispute. And yet, the PLA still seems to be guilty of cross-border incursions into India.

Personally, I doubt very much that China actually has any serious intent to resolve this border dispute. There are some very deep-rooted reasons for that. India and China have between them around about 38% of the world’s population. Both of them have major gender imbalances, far more young men than young women. They also have only 10% of the world’s water, and that border happens to sit on a major watershed. So, it is strategically significant.

It is not to be under-estimated and the tensions around that border are likely to continue. We at Nomura collectively expect India to look to build a still stronger economic and strategic relationship with Japan. It will also help that Japan and India do have a common problem with China as a neighbour.