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Markets Face a Test of Geopolitical-Risk Premiums This Week

A string of recent events has the potential to drive big market moves.

Markets Face a Test of Geopolitical-Risk Premiums This Week
Armed police officers patrol streets near the scene of a terror attack in London, U.K., on Sunday, June 4, 2017. (Photographer: Luke MacGregor/Bloomberg)

(Bloomberg) -- Investors hoping for the return of market volatility should be careful what they wish for this week, with geopolitical risks looming.

The decision by a Saudi-led alliance of four countries to sever ties with Qatar is just the first in a string of events with the potential to drive big market moves. The sudden isolation of the Gulf state helps it join a growing list of political hot spots that includes the Korean Peninsula and Brazil.

Here’s a look at what’s on the worry list for investors:

Qatar Quarrel

Saudi Arabia, Bahrain, the United Arab Emirates and Egypt said they will suspend travel to and from Qatar, escalating tensions triggered by the country’s close ties with Iran.

Markets Face a Test of Geopolitical-Risk Premiums This Week

The spat sent the nation’s equities to the sharpest dip since 2009 and jolted oil markets. In early trading Brent crude registered a 1.6 percent gain, but the tension wasn’t enough to allay bearish sentiment for long, as traders speculated it wouldn’t seriously affect energy exports from the region.

Markets Face a Test of Geopolitical-Risk Premiums This Week

U.K. Heads to the Polls

British voters are set to vote in a new government on June 8, with Prime Minister Theresa May’s once-formidable lead shrinking amid a series of attacks that has threatened to make terrorism the dominant theme of the campaign’s final days.

A surprise victory for the opposition Labour party would, for one thing, augur expansionary fiscal steps that could alter the outlook for U.K. yields and the pound, while a hung parliament -- where there is no majority party -- could see a lack of clarity on Britain’s policies for some time.

But there’s a “growing sense among traders that this could be U.K. election 2015 ‘deja vu all over again,’” according to Stephen Innes, senior Asia-Pacific currency trader at Oanda Corp. in Singapore.

Markets Face a Test of Geopolitical-Risk Premiums This Week

The pound surged after Conservative David Cameron won a majority in 2015, in contrast with polls at the time. Cameron would later resign after the 2016 Brexit referendum.

For now, the pound is showing it’s “desensitized” to the shocks of terrorist atrocities, Innes wrote in a note on Monday.

Monday’s outsized gains for the peso, after Mexican President Enrique Pena Nieto’s party appeared to pull off a narrow victory in the election for governor of the country’s largest state, may be one early bellwether of the market-moving impact of such polls.

Comey to Testify

Fired FBI Director James Comey is set to testify before the Senate Intelligence Committee on Thursday about his conversations with President Donald Trump regarding allegations of Russian interference in the 2016 election.

The long-anticipated testimony may drive further moves in U.S. equities and the dollar in a reprise of market swings in May. Assets tumbled then on the news Comey had written a memo alleging Trump made a request to drop an FBI investigation into former National Security Adviser Michael Flynn. 

Markets Face a Test of Geopolitical-Risk Premiums This Week

The dollar dropped to levels not seen since the November election while the Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher. The benchmark S&P 500 retreated the most since September.

To contact the reporters on this story: Eric Lam in Hong Kong at elam87@bloomberg.net, Isobel Finkel in Istanbul at ifinkel1@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jeremy Herron