Global Markets Shrug off Event Risk as Central Bank Cash Remains King [OPINION]

One of the more interesting evolutions of the global financial markets is its casual attitude towards "event risk" - the kind investors used to spend many hours analysing as they decided where and how to allocate their cash.

With perhaps the most violent anti-American protests in the Arab world in years, simmering tensions between Japan and China that haven't been witnessed in decades, and a potentially catastrophic clash developing between Israel and Iran, it seems almost implausible to imagine that investors are ignoring the market fires that these events, and others, could conceivably ignite.

What seems fairly clear in the current environment, however, is how little all that seems to matter now that central bankers have turned the liquidity taps as far as they can "twist". Suddenly, a week in which political event risks could scarcely be greater, we're seeing seven-month lows for the traditionally safe-haven US dollar and multi-month highs for risky equity markets in Asia and Europe.

Japan, the world's third-largest economy, counts on China for around $340bn in annual trade, a critical cash lifeline to its moribund economy that itself is being kept alive by the machine-like injections of liquidity by its central bank policy makers. It's impossible to say at this point what impact the latest round of anti-Japan demonstrations - linked to a centuries-old ownership dispute over a group of desolate and deserted islands - will have on economic relations between the two, but US Defence Secretary Leon Panetta has said he remains "very concerned".

Riot police have quelled protests in Shanghai and protesters in Beijing pelted the Japanese embassy with eggs and bottles over the weekend. Dozens of Japanese businesses have been vandalised and many more branches of blue-chip Japanese companies have been voluntarily shut down over safety concerns. Stock markets in Japan were closed to mark the Respect for the Aged public holiday today (Monday) but the benchmark Nikkei 225 sits within a few points of a five-month high.

Meanwhile, Muslim demonstrations in protest over a film that allegedly insults the Prophet Mohammed have intensified, spreading as far east as Indonesia to engulf 20 nations and threatening to further erode any confidence in the hope that the recent push towards democracy in the Arab world would deliver governments capable of controlling the radical elements within them.

Netanyahu's stark appraisal

The violence witnessed in oil-rich Libya, which resulted in the murder of US ambassador Chris Stevens and three other American embassy staff, would normally have led to short-term spike in global crude prices as investors fret about supply disruptions. That presumed price drive would have been given even more impetus by the escalating tensions between Israel and Iran, particularly in light of Israel's Prime Minister Benjamin Netanyahu's stark appraisal of Iran's alleged nuclear weapons programme on US television.

Netanyahu told NBC's Meet the Press that Iran is only six or seven months away from having the capability to build a nuclear bomb and urged the US to set "red lines" for Tehran if it doesn't back away from weapons-making. Iran's top military official, Mohammad al-Jafari, has said his country would retaliate by striking US and Israeli bases in the region and disrupt trade in the Strait of Hormuz if Israel were to carry out planned attacks on Iran's nuclear installations.

US crude prices are around 1.5 percent lower than Friday's close and still sit firmly under $100 a barrel.

The current optimism isn't even supported by the broader economic narrative: a recent poll of global economists by Reuters indicated that most expect growth in China, the world's second-largest economy, to slow to levels not seen since 1999 this year and next as the government transitions to a new leadership and the domestic stimulus programmes begin to dry up.

The situation in the United States seems little better, particularly after disappointing jobs and manufacturing data that suggest the tail-end effects of President Barack Obama's $780bn stimulus plan are beginning to peter out. Investors won't need to be reminded, of course, of the impending presidential elections or the fast-approaching "fiscal cliff" ($600bn in tax hikes and spending cuts that will automatically kick -in on 1 January) but that hasn't stopped them from marking US stocks (in the form of the S&P 500) at a four-year high.

Stocks testing 15-month highs

And don't forget Europe, where street protests in Lisbon were a reminder of the difficulty in imposing deep public spending cuts on to shrinking economies with high jobless rates - something sure to keep the mind of Spanish prime minister Mariano Rajoy occupied as he fends off pressure from around the region to seek formal EU aid and trigger bond purchases from the European Central Bank's newly created programme of "Outright Market Transactions". Then there's Greece, which continues to seek more time to meet EU/IMF-mandated targets on spending cuts while iis economy skids into sixth year of contraction.

Nevertheless, European stocks are testing 15-month highs and the single currency has surged to its highest level against the US dollar since May.

The miracle elixir, it seems, is the open-ended power of the ECB and the US Federal Reserve. Cash injections of around $85bn a month from the latter and a pledge of unlimited bond purchases by the former seem to have washed away the larger concerns of limp economic prospects and simmering political tensions.

At least for the moment.

What should worry investors who are catching this market ride at a late stage is that the sugar-rush of central bank support fades quickly once the economic costs of the current risks are better understood.

Inflated markets, we've come to learn the hard way, never fall quietly.