Is the West Forcing Volatility in Global Markets?
Iran's nuclear program has the western world on its toes. With fears of massive nuclear proliferation, the United States as well as the European Union is considering significant sanctions against the Middle Eastern nation, in an attempt to deter nuclear advancement.
The European Union pushed forward with an oil embargo against Iran on Monday in an effort to prevent Iran's continued nuclear efforts. Considering that Iran is a large player in the global crude oil trade, do investors have to be concerned about its prices in the long-term?
Crude oil and natural gas typically react to macroeconomic and global events as a function of supply and demand. When investors are scared about a decline in supply, prices are likely to shoot up. In the Middle East, any sort of violent conflict or political stand-off tend to spur fear.
Ultimately, investors will have to wait for global stability and harmony. The west will either have to accept nuclear development in the Middle East or will have to prevent it. The west will also have to solve its own financial problems before being able to maintain symbiotic trade with the rest of the world's nations. In the end, countries like the United States will have to solve its own problems in order to maintain smooth, positive markets.
Will There Be Long-Term Change?
Apart from Middle Eastern relations, global investors are concerned about sovereign debt in the western world. Both the United States and Europe are in dire conditions, but American investors are currently concerned about the Federal Reserve's plans for monetary policy. Without another round of quantitative easing, some investors fear that the United States will be unable to spur long-term economic and employment growth.
There are plenty of skeptics, however. The first two rounds of quantitative easing had very marginal effects on the American economy, and even had adverse effects. On one hand, unemployment never really improved due to quantitative easing. On the other hand, quantitative easing resulted in inflated commodity prices, which is not necessarily a good thing for the average American. For example, rising crude oil prices directly results in higher gas prices at the pump.
Investors also have to keep in mind that international macroeconomics will play a large role in the United States' future. For example, consider that European countries could default. If they defaulted during a third round of quantitative easing, American equities are likely to fall rapidly, despite the Fed's attempts to pump money in the market. So, given extreme international uncertainty, the Fed may be resistant to popular opinion regarding QE3.
During these uncertain economic times, some action may be better than none. Some traders believe that quantitative easing would, at the very least, prop up equities and give American some peace of mind while European concerns drag global markets downward. However, is a temporary, artificial boost best for Americans in the long-term?
The short answer is no. Continued Fed intervention is unlikely to solve long-term problems. Its revised strategy to purchase long-term debt and sell short-term debt may or may not have different results, but it seems likely that the long-term implications will not be much different than the first two rounds of quantitative easing.
Regardless of what the Fed does, traders will be able to profit from any comments made. While the overall economy may not improve, independent traders can make money if they pay attention to the news. If traders keep up with real-time news, they may be able to capitalize on short-term movements in the equity markets.
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Traders who believe that world stability can be achieved might want to consider the following trades:
- Short the US Dollar index, which will likely fall if the Fed takes monetary action in order to spur US equity markets.
- Long the Euro, as European fears may ease up on positive American news.
- Stay neutral on crude oil and natural gas, which will raise in price very gradually if Middle Eastern supply fears are quelled.
Traders who believe that global conflict is imminent may consider an alternate position:
- Long the US Dollar, which will likely gain against both the Euro and the Chinese Yuan.
- Financial institutions may decline if the Fed repeatedly declines to enact QE3.
- Commodities will skyrocket if Middle Eastern tensions are heightened and embargoes are sustained.
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