Market report: Citi warns of geopolitical tremors

Investors’ “indifference” to the threats “is unlikely to last”, the US bank has warned

On what was the worst day for the FTSE 100 since March, Citigroup sounded an ominous warning for investors.

Geopolitical risks, including the rise of jihadist extremists in the Middle East and simmering tensions between Russia and the West, are “proliferating”, said analysts at the US bank, while investors’ “indifference” to the threats “is unlikely to last”.

Citi’s timing was apt. Geopolitical factors helped to drive the 97.55-point fall to 6,676.08 suffered by London’s benchmark index, with brokers citing the air strikes in Syria by the US and its allies as a reason for the sell-off, as well as the downing of a Syrian fighter jet by Israel.

Nevertheless, so far this year the global markets have more or less shrugged off the mounting violence around the globe. Despite the 1.4pc drop in the FTSE 100 on Tuesday, the index is only down 1.1pc overall since the start of 2014.

“The annexation of Crimea and Isis’ rejection of the Sykes-Picot borders in the Middle East risk the return of border disputes, largely unseen since the Second World War. Tensions between Russia and the West have prompted sanctions and a revival of nuclear rhetoric,” the Citi analysts reminded clients.

“Historically, geopolitical risks have impacted markets through one of two transmission mechanisms: a growth shock or an oil price shock – or both, as in the 1973 crisis. Today, central bank support has limited the impact of disappointing growth on markets, and the emergence of US shale has muted the impact of an oil price shock, raising the question of whether markets have outsourced geopolitical risks to central banks.”

But the US Federal Reserve may not act as a buffer for long, they said.

“Fed tightening clearly represents an important test for global financial markets. It could trigger increased market volatility.

“And if this were to occur at a time when shale oil production is less able to dampen volatility in the oil price then finally global investors might be forced to take real notice of recent worrying geopolitical developments.”

Full article: Market report: Citi warns of geopolitical tremors (The Telegraph)

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