Political timetable to drive markets 2012?

With the ECB patching up the eurozone crisis by funding cheap three year loans to European banks buying sovereign debt and Bernanke’s last exercise in jawboning causing only a one day blip in markets, 2012 may be the year when central bank announcements give way to the political timetable as the main driver of sentiment. Some highlights ahead.

A general election in Greece (April-May), a presidential election in France (22 April and 6 May 2012) and the Irish referendum on the EU fiscal compact (31st May). Will agreements on the Greek bailout and the European fiscal treaty suffer reversals, if so what are the implications for bond markets in Portugal and Spain?

Syria – amid Israeli talk of the ‘window’ of opportunity closing on Iran nukes will there be a ‘humanitarian’ intervention in Syria, would Iran respond to by sponsoring unrest in Bahrain and shia parts of Saudi Arabia, would Russia and China respond to a non-UN authorised intervention in Syria with economic measures-–i.e more non-dollar denominated trade?

US election- Will it be two ‘big Government’ candidates Romney V Obama, if so Romney’s tilt towards the military and Obama’s towards welfare will ensure any restraint on government spending will be moderate post election, which means increasing inflation expectations and a softening dollar during and after the election campaign.

China leadership handover 2012-13 –the attitude of the new leadership will likely determine whether China hard lands this year – more stimulus for stability possible, but not directed at Western export demand.

Syria, Oil and the Federal Reserve

While an Israeli-US air strike on Iran this summer is unlikely some sort of US-NATO intervention in Syria - no fly zone, humanitarian corridor, missile strikes - is conceivable. It could be done without UN authority as in Serbia-Bosnia. A Syria-Iran response, perhaps covert sponsorship of shia unrest in Bahrain and Saudi Arabia- would raise the price of oil. But could this be a desirable outcome for US policymakers? The US economy is recovering. If it continues to do so capital with flow out of Treasuries into riskier assets, reducing bond prices and therefore raising interest rates on Government debt. The US can't afford a rise in borrowing costs. An oil price spike that stalls the US recovery by raising energy costs would dam up money in treasuries through safe haven investment demand. This presumably helps the Fed by reducing the amount of asset purchases needed to keep rates low. It also gives the Fed a context in which the impact of its policy measures can be maximised, with the softening effect of further QE on a strengthened dollar benefiting US exporters and US multi-nationals.

Iran conflict not this year

Tensions may increase but don't think 2012's the year. Too much electoral risk for Obama, too much military risk for Israel to strike without the US - Syria more likely alternative this year. Doves to get chance for Iran regime change through sanctions. Hawks to wait for intervention from a new Republican President or a second term Obama. If monetary policy erodes dollar confidence 2013-14, Iran conflict will sure up dollar demand and get the blame for rising oil prices. US military ultimate back-stop for dollar once central banks fail to convince.