Last week, deal – however temporary – for the US debt ceiling was reached between the two sides of the aisle in the US congress. This will avoid a catastrophic default, which could have had unforeseen consequences on international markets. Meanwhile, the Non-Farm Payroll figure for May 2023 showed an astonishing 339,000 increase in the number of jobs, well above the 190,000 that had been estimated by the market, a further proof of the US job market resilience. In the past, these events would have been more than enough to determine investors’ sentiment in the market. But these days are different.
Clearly, macro-financial conditions still have a large impact on market sentiment and behaviour. But in this period, geopolitics seems to reign supreme for investors’ moods, and for market dynamics. In this respect, several items have been on the agenda over the last few days. First is the OPEC+ summit, which is trying to agree on another cut to oil production in order to prop up oil prices. Saudi Arabia is reportedly in favour of a cut, while other countries seem more reluctant. The decision by OPEC on oil production is the traditional “transmission mechanism” between geopolitics and the global economy. But in this period, geopolitics tends to have a much more direct impact on investor sentiment.
In Europe, at the end of last week, a meeting of the European Political Community (EPC) took place in Mimi Castle in Bulboaca, Moldova. The EPC gathers around the table the 27 EU countries, plus 18 additional non-EU European countries to discuss security and energy-related issues. The choice of Moldova was not casual. Moldova has a region, Transnistria, which is already controlled by the Russians, and many fear that the country could follow a fate similar to that of Ukraine. Clearly the EU countries wanted to make it known that they will stand beside Moldova, as well any other country that could be threatened by Russia (including Armenia, Azerbaijan, and Georgia, all of which were present at the meeting). On the sidelines of the meeting, French President Emmanuel Macron backed Ukraine’s NATO membership, in a U-turn that follows that of Henry Kissinger, which we discussed last week.
Surprisingly enough, Turkey was not invited to the meeting, despite having applied for EU membership several years ago and clearly being the gateway between Europe and the Middle East. In Turkey, President Erdogan began his third mandate, and his third decade in power. In a move that has pleasantly surprised market participants, Erdogan has appointed as new Finance Minister Mehmet Şimşek, a former Merrill Lynch bond strategist who served as Finance Minister and Deputy Prime Minister in one of Erdogan’s previous administrations, until 2018, when he was replaced by Erdogan’s son-in-law Berat Albayrak. The hope by the industry is that Turkey will return to more orthodox policies, after the deviations of so-called Erdonomics, which brought inflation to nearly 50% per annum. Reportedly, Şimşek promised to adopt “transparency, consistency, predictability and compliance with international norms” as the “basic principles in achieving the goal of raising social welfare.”
In Asia, tensions are instead increasing between the US and China. At the Shangri-La Dialogue in Singapore, US defence secretary Lloyd Austin “criticised China for conducting dangerous aerial intercepts over the South China Sea,” according to the FT. This happened just a few hours before a Chinese warship nearly collided with a Canadian frigate in the international waters of the Taiwan Strait, in what the Canadians called “an unsafe maritime interaction.” The risk of unintended incidents that quickly escalate into a direct military confrontation is increasing fast in the Indo-Pacific. If anything closer to such a confrontation were to happen, the repercussions on financial markets would be immediate and significant.
