More volatility is certain as global financial markets go down

The one thing you can be certain about uncertainty is that it will produce greater volatility in global financial markets. The adviser to the Abu Dhabi Royal family who made a call on volatility two weeks ago at the Hedge Funds World Middle East conference is clearly more than worth his salary (click here).

So are the nuclear reactors melting down or not? Does that matter when the Japanese economy is already so disrupted? Will Libya be another Iraq for the Western allies? Will the Bahrain crackdown be the end of unrest in the Gulf States?

Uncertainty rules

Who knows? And that is the point. But the law of unintended consequences gives much room for thought on these issues, and that alone will be negative for financial markets discounting all possible future scenarios because none of this is very positive.

Higher oil prices are one common thread linking these three geopolitical events. Japan will have to burn oil and gas to replace its broken nuclear plants. Libyan oil output is greatly reduced and could be damaged further. Unrest in the Gulf States adds to the risk premium on crude and fear about Iran.

Higher oil prices are inflationary. You do not need a PhD in economics to work that out. They are also a tax on the global economy at a time of soaring budget deficits. Remember the low growth, high inflation, stagflation of the 70s?

Now aside from Japan, global financial markets are still close to their recent two-year highs and looking glibly at a recovery scenario. You can even see that in the UK where three years of austerity cuts actually come into operation from next month.

US recovery?

Or what of the US with its dismal recent housing data putting an end to talk of a housing recovery, or its car plants now shutdown due to a lack of parts from Japan, or the iPad customers on a waiting list because key components are made in that country? And that with the great stock market bubble from QE2 money printing about to end in June.

Indeed, global financial markets actually started to turn down a week before the Japanese earthquake struck, the allies decided to attack Libya and the Bahrain opposition was crushed.

They may well zig-zag on their way down, with greatly increased volatility. But the smart money is now on the short side with markets heading down. That is what the ArabianMoney newsletter will be looking at next month with analysis unique to our growing band of readers (sign-up here).