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BlackRock raises Middle Eastern fears
09 July 2013
Oil-shock risk for weak recovery
The uncertain political situation in the Middle East is a “major concern” for the global recovery, BlackRock has said.
In a research note, Russ Koesterich, chief investment strategist at BlackRock, said the recent collapse of the Egyptian government, continuing civil war in Syria and “rising tensions throughout the Middle East” had created “the potential for more unrest” and should be an issue of concern for investors.
Koesterich also identified the potential for rising political and terrorism risks to impact global oil supplies, with oil production in Nigeria, Iran and Iraq already affected. Although the US has laregly been able to offset the effects of disruption through increasing its own production, he wanred that oil prices are creeping higher.
"Any further disruption in production would likely send them higher still. While a stronger jobs market is helping the US consumer, higher gasoline prices would represent a painful headwind at a time when many consumers are still getting back on their feet."
He added that despite the US economy failing to 'take off' as many had predicted, strong job creation rates will lead the Fed to start winding down QE later this year.
Highlighting a non-farm payroll report of 195,000 new US job in June – consistent with the average 190,000 new jobs a month for the past year – Koesterich said the US recovery was “solid if uninspiring”, but “making progress”, although susceptible to interest rate risks.
He argued the US Federal Reserve would be forced to “pull back on its extremely accommodative monetary policy”, with a winding-down and end to QE starting in the autumn, forcing bond yields to rise.
Were yields on 10-year Treasuries to rise to above 3%, the impact on the housing market, corporate margins and yield-hunting investors would be sufficient to pose a threat to the US recovery, Koesterich said.
Koesterich also highlighted the potential for further problems inthe Eurozone, despite the relatively quiet first half of 2013, with increasing popular unrest over European austerity.
“With Europe still mired in a recession and its banking system fragmented, we continue to view the region as a major risk factor," he noted.