5 People Shot Dead in Syria as Portugal Faces Critical Vote

The whole Middle East is threatened with chaos as a massive bomb explosion at a Jerusalem bus stop complicated the already volatile situation in the region today. On top of an civil war in Libya, and an international bombing campaign, a split in the army and the risk of a civil war in Yemen, demonstrations in Syria and a volatile sense of quiet in the rest of the Arab countries, we now have the unpredictable consequences of a renewed campaign by the Palestinian organizations Hamas and Islamic Jihad. If we consider the recent arms seizures by Israel, the shipments of which were blamed on Iran, the outlook seems more uncertain in the Middle East than at any other point this decade, to say the least. This should support oil and gold prices in the absence of interest rate rises.

In Japan, highly elevated radiation levels were detected in many kinds of local farm produce in Fukushima and Ibaraki prefectures, while the government advised residents of Tokyo not to make infants drink tap water. “Japan’s science ministry says radiation exceeding 400 times the normal level was detected in soil about 40 kilometers [which is outside the evacuation zone] from the troubled Fukushima Daiichi nuclear power plant... Gunma University Professor Keigo Endo says radiation released by the iodine is 430 times the level normally detected in soil in Japan and that released by the cesium is 47 times the norm.” according to Japanese reports.  

Meanwhile the bailout of Portugal is imminent as markets anticipate the failure of the ruling Socialist Party minority government, headed by Jose Socrates, on the back powerful signs that the envisioned austerity package will not receive Parliament approval. This outcome was being debated in late December, and it was widely anticipated that the vote would be an exceptionally difficult one for the incumbent. Mr. Socrates has expressed his determination not to stay in power if his proposed measures are not adopted, and since the Socialist Party has the largest share of seats in the Parliament, it is doubtful that the country will be able to inaugurate a new administation in case that the present government should fall. The expectation is that a new election will be held in 55 days, and if past crises of similar sort in EM can be relied on to provide guidance, we may anticipate an even more fractured distribution of seats to emerge in the aftermath. The EURUSD rate can be expected to remain under pressure as a consequence, but the effect will be limited due to the Fed`s well-publicized program to monetize U.S. public debt. 

Gold (XAUUSD) is even higher today, as stock prices around the world fall, albeit modestly, and risk sentiment pushes the USD and the yen higher against most peers. The USDJPY was quoted with little change from yesterday. There is no sign of a real capitulation and the sales could go on for a while, perhaps until after the issues in the Eurozone receive some clarity. For the longer term, the upheaval in the Middle East, pressures on oil prices, and the resulting inflationary risk pose the strongest threats to global growth. As before, we believe that the world will go through a turbulent period of great intensity, but the true scale of this will probably remain obscured until central banks are forced to reconsider their monetary policy stances.