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.

Libyan Rebels Approach Gaddafi Hometown, Portugal Remains in Crisis

The weekend has been heavy in terms of activity, and Monday 28^th is more active than a typical first day of the week would be.

In Portugal, it is expected that the President will meet with party leaders in order to determine the date of the oncoming early elections, which will end the current parliament`s tenure two year before the legal term. The outgoing PM Jose Socrates has been insisting that Portugal does not need a bailout yet, since it remains in possession of enough cash to meet redemptions of Eur 4.5 billion bonds due April 15th. There seems to be some agreement among Portuguese authorities that June redemptions of a similar size pose a different risk, and the next election will probably take place that month in order to face the turmoil with a strong and responsible government in place. Yet, whether it is a good idea to place these two events in such close succession is up for debate, and this is reflected in the market reaction as well, where traders demand a yield of 7.66%, or a spread of 260+ for funding the government`s 10 yr borrowing. Spain seems to have escaped similar treatment for now, perhaps due to the ruling government`s commitment to bring the deficit back to 6% of GDP from 9.2% in 2010.

In Syria, where demonstrations have caused deaths and a massive outpouring of anger in the south of the country, the Assad regime has adopted a very measured approach, no doubt sobered by what is happening to the Colonel in Libya. Promises of widespread reforms are flying in the air, but since similar promises were made in the past too, and never fulfilled, it remains to be seen how credible the latest pledges will seem to the people. Still, the Arab Revolution is a real and serious threat to the survival of these regimes, and as Basshar Assad has proven himself to be a reasonably flexible leader in the past, there is some hope that that bloodshed of the kind seen in Libya or Yemen recently can be averted. From a trader`s point of view, Syria is a tiny country with only a limited economic role in the region, but its pivotal situation and role in the Arab-Israeli conflict make it an important component from a strategical point of view. In Yemen, after yet more clashes and protests, the U.S. ally Ali Abdallah Saleh is reported to have agreed to leave the country, but not immediately. His ruling party has also declared its support for him.

Finally, in Japan, there is worrying evidence that the nuclear crisis is getting deeper and harder to control, as reports of radiation leakage into the sea, and radiativity levels reaching up to 100,000 times the natural norms frighten the Japanese people. Authorities have declared it likely that the resolution of the issues will last for months, and an influential advisor to the PM has suggested that Japan be decentralized in order to avoid similar events when Tokyo is hit by an expected earthquake-tsunami combination sometime in the future.

In consequence of these developments, global stocks showed a mixed performance, while the USDJPY and AUDJPY pairs appreciated, and the Euro fell in reaction to Portugal concerns. Gold and oil were lower. This is probably due to the rapid advance of rebel forces in Libya this weekend, which brought them close to the Colonel`s birthtown, raising hopes that the crisis and the war may reach a conclusion earlier than expected. There is not much that can be said on this matter, since conditions are volatile, and it is difficult to predict what kind of surprises may be awaiting both sides.