RED OCTOBER ARRIVES: A Look At The Geopolitical Risks That Could Shake Markets

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Back in July and a few times since, Nomura's Alastair Newton flagged a few risks that would "feature significantly on markets’ radar," in October.

In a new report titled 'Red October arrives' he has an update on those issues.

  1. U.S. — There is a "non-negligible risk" that the White House and Congress will fail to reach an agreement on the debt ceiling, with there being a technical default. But even if the U.S. passes the deadline for the deal there is a "very low probability of a default on Treasuries." There are two other big issues that have emerged between President Obama and Congress: President Obama's decision to seek congressional support for a military strike on Syria, and the election of Fed chair.
  2. Middle East and North Africa (MENA) — The Sunni-Shia tensions in the Middle East likely to increase it is likely that markets will demand "an additional perceived political risk premium on oil into 2014." Meanwhile, the negotiations on Iran's nuclear programme (E3+3, which refers to the combined diplomatic effort of the EU 3, namely France, Germany, and the UK, along with China, the U.S., and Russia) are set to pick up again on October 15 - 16 which is "encouraging."
  3. EU – Germany won't have "fully functioning governance" for a few weeks and this could complicate the Troika's (the European Commission, the IMF, and the ECB.) review of Greece, and the constitutional court's ruling on the ECB's Outright Market Transactions (OMT) programme. Meanwhile, the Italian government is expected to be "unstable" and "struggle to agree to the 2014 budget." 
  4. Turkey — While the protests in Turkey are not at the same scale as the protests seen this summer, they have become "more politicized and [are] seen as indicative of increasing polarization in Turkish society."
  5. Japan — Prime minister Shinzo Abe has yet to announce details of his 'third arrow of structural reforms' which are likely to face opposition from within his own party, once the Diet (Japan's parliament) reconvenes on October 15. 

Newton also warns that recent protests in Turkey and Brazil stemming from corruption and inequality surprised markets and raised concerns about where else we could see civil unrest. While he writes that timing is hard to predict,  there are at least ten other potential countries, namely, Argentina, India, Russia, Venezuela, China, Indonesia, South Africa, Egypt, Malaysia, and Thailand.



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