Fasten your seat-belt, hold the nearest handrail, dump your equities, your Dollars and grab all of the Swiss Francs, Japanese Yen and Gold you can get your hands on. Ignoring the former two imperatives designed to do little more than compensate for the impotence of the latter requests, the above risk-off strategy could be the destination of smart money in the coming months. Certainly, it has been in the trading days surrounding last weekend.
Last week, Vladimir Putin secured a mandate to govern through to his 24th year of premiership over the Russian state. The mandate may have secured the political integrity, and certainly political consistency, within the Russia; however, across the globe the re-election has been anything but stabilising. Outside of the Rouble, the reaction has been minimal. The principal reason for a quiet risk off strategy was the fact that a Putin victory was the base-case for almost every investor across the globe.
Putin’s victory and daunting new, 6-year mandate represents an increase in underlying (geo)political risk. Unequivocally, Putin is one of the remaining faces of the East-West divide across the world. As China’s Xi Ping consolidates power in Asia, less risk is created due to the trade dependencies between the two international leviathans. With Russia, however, the story is very different.
Following the election of Trump to rule over the United States, the involvement of a deviant Russian state has made headline news with alarming frequency. A refreshed mandate for the Russian principal is likely to cement the paradigm of political risk that we have experienced for a little over one year.
As markets sense an increase in political risk they are swift to dump risky equities and the US Dollar. Depending upon the severity of the risk, money either flows into domestic (US) treasury and bonds, or other safe haven assets. Frequently, the benefactors of a geopolitical risk-off move and ultra safe haven bid include the Japanese Yen, the Swiss Franc and Gold, raising their desirability and market price.
Alongside the Russian threat to the Dollar, and thereby substantiating the hyperbole of the first sentence to this article, is the increasing audibility of Turkey and President Erdogan on the international stage. Earlier this week, the controversial leader announced Turkey’s intention to continue to extend its dangerous and threatening military campaign in the war-torn nation of Syria.
This news cannot be digested without a reminder of the suspension of passporting rights between the US and Turkey only a few months ago. Movement between the United States and Turkey was suspended, inviting a decimation of the Turkish Lira, but also to a lesser extent the Dollar. Stopping short of the exaggerated claim of a tripartite proxy war in the Middle East, a resolution of interfering foreign policies must be achieved if the global economy and the dollar are to invite plain sailing in the foreseeable future. Arguably, the dismal performance of the Dollar in 2017 could be attributable to a peppering of risk-off moves, frequently down to outright terrifying geopolitics that upon every occasion forces the marginal investor to avoid equities and the dollar at this time and to seek return elsewhere.
Discussion and Analysis by Charles Porter