Asian stocks followed Wall Street lower on Tuesday as the safe-haven Yen and gold strengthened after a disappointing start to the week. Apparently, it’s geopolitical risks leading the direction. While market participants were focused on the UK general election and former FBI head James Comey’s testimony on Thursday, Qatar hit the headlines on Monday after tensions between the country and its neighboring nations escalated.
The surprise decision led by Saudi Arabia to cut ties with Qatar left many investors puzzled on how this outcome may impact oil prices. The initial reaction on Monday sent Brent futures 1.6% higher, but gains were reversed later in the session as investors realized that the political tensions would not lead to production outages. With Qatar’s crude production capacity of approximately 650,000 barrels per day, even output disruptions would not have a significant impact on prices. I also don’t believe Qatar’s LNG exports will be affected, despite Saudi Arabian and UAE waters being restricted.
Continued rising tensions might risk OPEC’s oil production agreement, and if Qatar decided not to follow the agreed production quota, other nations could follow, resulting in a failure of the quota policy deal. However, I think this scenario remains unlikely.
In currency markets, the dollar fell to lowest levels in six weeks against the Yen. This shouldn’t be surprising given the scale of event risks this Thursday, specifically UK’s general election and former FBI director James Comey testifying before the US Senate intelligence committee about potential Russian interference in 2016’s US election.
The pound managed to remain bid, despite the weaker than expected PMI data and conflicting poll outcomes. The latest polls indicate that the Labour party continues to narrow the gap on the Conservatives. YouGov showed a Tory lead of just four points as opposed to ICM which indicated an eleven-point lead. Whether Britons were seriously swayed in the aftermath of Saturday’s attack will be known on Thursday, but I think if the Conservatives manage to increase their lead it could potentially send GBPUSD above 1.3.
