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How Syria is affecting markets

By Sheyna Steiner ·
Thursday, August 29, 2013
Posted: 3 pm ET

A potential U.S. attack on Syria is enough to make markets nervous. As the situation plays out, the price of oil and gold could be buoyed by the uncertainty, according to Paul Christopher, chief international strategist at Wells Fargo Advisers.

Anyone hoping for smooth markets this fall was bound to be disappointed anyway with continued agitation around Fed tapering. Now though, with the Syrian state of affairs having crossed the President's bright red line, the uncertainty around all kinds of government policy is causing markets to swoon -- not to mention the looming debt ceiling debate.

Why all the consternation around Syria and the Fed? First of all, it's a seasonally weak period of the year, according to Christopher. With nothing else to grab onto, news becomes more salient for markets. The idea that the Fed could begin to wind down the policy of quantitative easing has been enough to throw markets into a tailspin over the summer. Combined with the uncertainty of foreign policy, it's enough to send markets into palpitations.

The effects are not limited to domestic markets either. Emerging markets have entered a tailspin of sorts. "The main reason is tapering," says Christopher.

Here's why: Taper talk means the Fed will buy fewer Treasuries. Current policy calls for purchasing $45 billion worth per month. With the Fed out of the market, prices will go down, and yields will go up. Just imagining the central bank out of the large-scale Treasury-buying business has been enough to push yields up this summer -- to the extent that many investors have taken a renewed interest in government bonds.

"So a lot of money has come out of emerging markets, which has been a source of yield for people, and that is a problem for emerging markets that have trade gaps. They pay more in imports than they get for exports," Christopher says.

Countries such as India, Brazil, South Africa, Indonesia and Malaysia have all seen investment dollars migrating back to the U.S.

"At the same time you have these trade deficits -- so how are you going to pay for all that oil you have to buy, which, by the way, is getting more expensive in dollars?" says Christopher.

Oil has to be purchased in dollars, which means flipping on the printing press in India to buy more dollars -- an inflationary move that depresses the currency.

"Countries like India are seeing Syria as a very unwelcome headache; it's a bad time to pay more -- even $3 or $4 dollars more per barrel for oil," Christopher says.

Ahh -- the tangled webs of global commerce.

Follow me on Twitter: @SheynaSteiner.

Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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1 Comment
August 31, 2013 at 10:09 am

Oh! Bomb! Ah!