This report was prepared by my firm LPL Financial
Geopolitical events have been reasserting an influence on the markets after a brief honeymoon period with a new U.S. administration for foreign leaders to assess and a global financial crisis to deal with.
Last week we witnessed India‘s election igniting a powerful global stock market rally on Monday, May 18 when the ruling Congress Party emerged victorious. If the hard-line nationalist main opposition party had won, Indian restraint against Pakistan would not be assured in the event of another largescale militant attack like the one that took place in Mumbai in November 2008. With the surprisingly strong showing by India’s ruling party, India is staying on the sidelines and looking to the United States to manage Pakistan’s jihadist problems.
This week’s North Korean nuclear test weighed on stock markets around the world on Monday and is a legal violation that warrants action by the
international community, according to President Obama. However, it was not a complete surprise. North Korea warned in late April that it would carry out a second nuclear test. Leader Kim Jong Il is preparing the next generation for leadership of the nation after his stroke in 2008. The increasingly isolationist policies are an effort to divert foreign infl uence from competing internal political factions. The UN Security Council and the other five participants in the six party talks (United States, Russia, China, Japan, South and North Korea) are beginning numerous consultations and meetings to work out a response. However, the response is unlikely to result in concrete action beyond additional censure and sanctions.
There are upcoming geopolitical events over the next few months that may have market moving impact:
- The Iranian elections on June 12
- Obama’s visit to Russia July 6-8
- The Afghanistan election on August 20 and the U.S. troop surge in that country
Iranian Elections June 12
Back on March 20, U.S. President Barack Obama spoke directly to the Iranian people, emphasizing the advantages of increased cooperation between Washington and Tehran and saying that the United States wants Iran “to take its rightful place in the community of nations.” Obama vowed when he took offi ce to extend a hand to troublesome countries “willing to unclench your fist,” but so far Iran has continued to advance its nuclear program and has shown little interest in renewed dialogue.
This past weekend, Iranian President Ahmadinejad said Iran will not hold any talks on its nuclear program until after the June 12 presidential election.
The election comes at a time of heightened concern. Last week Iran tested a missile easily capable of hitting Israel, and over the weekend U.S. Joint Chiefs of Staff Chairman Admiral Mike Mullen stated that Iran might be within one to three years of developing a nuclear weapon. These events followed President Obama’s message to Israeli Prime Minister Benjamin Netanyahu not to lose patience and surprise Washington with an attack against Iran; Israelis have made no secret about their lack of enthusiasm over Obama’s attempts to engage Iran.
There are four presidential candidates in Iran; two are considered pragmatic reformists, while the other two, including President Ahmadinejad, who is seeking a second term, are considered hard-line conservatives. The Iranians disagree on how to achieve their goal of consolidating influence over their neighbors to become a regional power and secure the nation’s borders. The pragmatists want to seize the opportunity and work out a deal with the United States in order to realize their objectives. The hard-liners argue that cutting a deal with the United States would lead to the Islamic Republic’s undoing. The outcome of the election may have some impact on U.S.-Iranian diplomatic dealings and the likelihood of action in time for the October deadline for progress imposed by the Obama administration.
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Obama Visits Russia July 6-8
President Obama is scheduled to make a July 6-8 visit to Russia. At the G-20 summit in the fi rst week of April, the Obama administration broadly rebuffed Russia’s demands for the United States to cede influence to Russia in former Soviet states on its western border in exchange for Russia granting U.S. forces a northern supply route into Afghanistan (as Pakistan becomes increasingly unstable). The countries quickly took confrontational stances on a wide range of issues.
Both the Americans and the Russians are hoping to replace the 1991 Strategic Arms Reduction Treaty (START I), or failing that, to extend the treaty—which expires in December—until a replacement can be crafted. While both sides seek to lower the cost of their nuclear arsenal, Russia is broadening the scope of the issue. Russia is attempting to link the START negotiations to those other topics—especially Ballistic Missile Defense (BMD) and military support for Poland. The nuclear arms talks are the only line of communication still open after talks over more contentious issues already have ground to a halt. Without the disarmament talks, Russia and the United States would be in a stalemate. So the meetings in early July may be market moving, as Russia makes a high stakes all-or-nothing gamble for gains across a wide spectrum of issues.
Afghanistan Elections August 20 and U.S. Troop Surge
While NATO forces will be increased over the coming months leading up to the August 20 elections in Afghanistan, the initial surge of U.S. troops into
Afghanistan to attempt to tip the balance against al Qaeda will not be until summer’s end. The best way to achieve the intent of the surge, to pacify the Taliban and to get them to agree to block al Qaeda operations in Afghanistan, is undergoing considerable debate in the Obama administration. The timing and magnitude of additional forces committed to forcing an arrangement with the Taliban are complicated by logistical hurdles. Without cooperation from the Russians, the United States is almost completely dependent on an increasingly unstable Pakistan for supplying the troops, and the surge would increase this logistical burden.
Adding to the stresses of the global recession, the uncertainty introduced by these upcoming geopolitical events may help to keep a lid on stock prices in the coming months.
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