Iraq a concern?

After a month of gains, the US and European share markets have slipped thanks to the World Bank’s global growth downgrade and the disturbing events from perpetually war-torn Iraq.  

Australian shares also remain under pressure after absorbing the news of retail sector profit downgrades and ongoing pressure on the price of iron ore, one of Australia’s major export commodities. According to Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital, “Bond yields were generally flat to up, but with the conflict in Iraq keeping a lid on them. Commodity prices were also mixed with oil and gold up on Iraq.”

While Oliver believes the current conflict between the Iraqi government and disaffected Sunni separatists is a potential correction trigger, it is unlikely to be anything worse. “Iraq has well and truly hit the headlines again with militants seizing several cities in the north and President Obama weighing up America’s options,” says Oliver.

The AMP economist explains there are two main concerns for investors to weigh up: the loss of Iraqi oil production which amounts to just over 3% of world oil production and the “threat of a wider (Sunni v Shia) Middle East conflict dragging in the US and its allies (again).”

However OPEC, says Oliver, appears to have enough spare capacity to meet any short fall from Iraq, while US shale oil has reduced the threat to the American economy, which may limit the need for a major intervention in the Persian Gulf.

Financial commentator Peter Switzer agues there are other factors for investors to digest apart from Iraq. “What the [US] Federal Reserve does in coming months is just one, but there is also some good news that is being ignored,” says Switzer. “Even with this Iraq uneasiness, the Shanghai Composite was up 0.74% [Monday] and is now up nearly 3% over the month. Why? It simply is better than expected economic data,” says Switzer.

Switzer maintains that China will be far more important to the Australian market than Iraq, while the interest rate deliberations of US Federal Reserve “will also be crucial to what happens to the greenback, the Oz dollar and our stock market.”