This is my 200th post. I intended to spend a bit of time on it. But the situation in Dubai is rather monopolising my time and my inbox is filling up with analysis from brokers most of whom probably couldn’t find the place on a map until yesterday.
Amid all the fuss there is one related issue:
Risk is currently under priced across the whole range of asset classes from equities to bonds to commodities to currencies.
Will the events in the Gulf cause investors to realise this?
And if so, how far will risk be re-priced? How far will asset prices fall?
So far we’ve seen what you would expect – European markets down 3% yesterday, Asia down 2-4.5% overnight, Europe down another 1.2% at time of writing. Commodities getting whacked, CDS spreads blowing out, a big moves into government bonds, a strengthening yen and strengthening dollar. Any share with any Mideast holders getting hit (on worries they might have dump stales to raise cash).
Will this continue? In the absence of a bailout of Dubai, yes I imagine it will.
Why should we care in the UK?
Two reasons aside from the knock on effects on UK asset prices (which would rather undermine what QE has been achieving). First, although details are sketchy, there are reports that Barclays, HSBC, Lloyds and RBS are all exposed directly. Second there is fairly large scale MidEast investment in UK commercial property. If they are forced to liquidate these assets it would hit both the jittery commercial property market and have a downward effect on sterling.
We’ll know more over the weekend.
In the meantime FT Alphaville is the best source of coverage.