Global shares have maintained an upward trend over the past weeks upon a combination of good economic data, strong profits and supporting US inflation figures. Over a one month period the S&P 500 index advanced 1.4 percent, the Euro Stoxx 50 Index advanced 4.79 percent while the UK FTSE 100 gained 7.9 percent, all including dividend payments. Add another 3 percent in currency movements for the European holders of US assets and the snapshot definitely looks impressive.

Investors have a tendency to ignore political risk, partly because they are difficult to price, tend to have short-term impact, or do not materialize. However, the current crop of risks have the potential of destabilising an otherwise healthy investment outlook. This year ‘sell in May and go away’ is at odds with the current market trend. However, the second half of 2018 may be determined by whims, policies, strategies and stratagems that have nothing to do with economics and finance.

Korea

Up until yesterday North Korea continued to move in a positive direction with President Trump set to meet North Korea’s Kim on June 12 in Singapore. Now everything seem suddenly in doubt as North Korea threw next month’s unprecedented summit into doubt by saying it may reconsider if Washington insists on pursuing a one-sided deal.

China

The US/China trade skirmish may continue to escalate even if President Trump and President Xi appear to be handling the crisis through midnight calls and trip to the US by Vice Premier Liu. A quick resolution is not expected even if the incentives remain strong to find a negotiated solution.

Iran

Trump’s confirmation that the US will withdraw from the Iran nuclear accord and reinstate sanctions threatens around 0.7 million barrels a day of Iranian oil exports at a time when the global oil market has tightened, it may also see Iran cause more trouble in the Middle East and develop nuclear weapons.

Worst, it threatens the relationship between the US and its allies notably France and Germany that may decide to stick to the accord while compensating any of their companies that are adversely affected by US sanctions.

The oil price has already moved up so the risks may be factored in. And of course, there is a way to go yet. The US sanctions on Iran and companies that deal with it won’t kick in until after a 90-180 day wind down period. And Trump’s approach as with many things looks like a negotiating ploy to get a better deal. So surprises may await.

Italy

Meanwhile, in Italy, the populist leftist Five Star Movement and populist far right Northern League look close to forming government. This was the worst possible scenario after the inconclusive March election given both parties’ background of Euro scepticism and support for irrational economic policies.

While it’s marginally negative for the Euro it’s not an immediate threat, but it will slow a Macron-led move to a more integrated Eurozone. And for Italy it risks a renewed deterioration in the budget deficit and an undoing of structural reforms which is negative for Italian shares and bonds. That said, the more extreme 5SM and League policies are likely to be softened down a bit in government and in any case politics is not often that stability is seen in Italy.

What is sending Italian bond prices lower and causing some distress on the Euro are reports that the 5SM and the League will be asking the European Central Bank for Debt forgiveness. On the news Euro zone banks slid. While the request seems unreasonable, it may set the tone for the relationship between Italy and the rest of the EU.

(Sources FinSec, Reuters)