In addition, the Paris tragedy will complicate the path toward a political solution to the European refugee crisis, and the outcome is still unclear. It could lead to closed borders and harden the case in the U.K. for leaving the E.U., or alternatively, we could see more cooperation and integration among E.U. members.
Geopolitics could start having a greater influence on markets going forward. Markets will have to contend with many political uncertainties in 2016. These include possible setbacks to the European project in the face of the refugee crisis and risk of more terror attacks; rising instability in the Middle East likely to be aggravated by the impact of low oil prices; a Russia and China increasingly assertive abroad while grappling with economic slowdowns at home; and a U.S. presidential election with a wide-open field of candidates and outcomes.
These risks are playing out against a backdrop of asset prices propped up by years of plentiful liquidity. Liquidity conditions may be less benign in 2016. The Federal Reserve (Fed) is set to raise interest rates for the first time in nearly a decade, and the events in Paris aren’t likely to alter this. Elsewhere, emerging market central banks and sovereign wealth funds have been selling reserves and risk assets to defend currencies and or plug budget holes.
This means markets are likely to pay more attention to geopolitics going forward, and it calls for cautious navigating in 2016. For more on the likely ramifications of the Paris terror attacks, read the full paper from the BlackRock Investment Institute, “After the Paris Tragedy.”
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.