The next big risks for stock markets after Cyprus

The first draft of the package, which involved taxing all banks’ deposits, was rejected by the Cypriot parliament. After a long and dramatic series of negotiations, an agreement was reached on a new Cypriot rescue package that spares the global market another episode of financial chaos and helps keep the euro currency bloc in one piece.
With one source of financial havoc narrowly averted, it is time to look ahead and anticipate the next big risks. In my view, there are three events that could pose risks for stock markets this year.
1. Uncertainty over the Italian government. The general election that took place back in late February yielded inconclusive results. The centre-left alliance led by Pier Luigi Bersani won a clear majority in the lower house, while in the Senate no political group won an outright majority, resulting in a hung parliament. Market consensus widely expects that politicians will form another technocrat government and Italy will stay on course with the austerity and reforms needed as a condition for international aid. Should the anti-reform group led by Silvio Berlusconi succeed in forming the government, global stock markets could take another blow as the risk of a euro-zone break-up would re-emerge.
2. US debt ceiling. In early February, US President Barack Obama signed into law a bill that helped defuse political conflict and put off a decision to raise the US debt ceiling through May 18. With that deadline soon approaching, markets will have to keep an eye on the heated debate about the high and rising US government debt.
3. German election. As the largest economy in the euro zone, the outcome of the German election will largely determine the future of the euro. A German federal election will be held on September 22. Recent polls conducted by Germany’s major polling agencies suggest that neither the incumbent coalition (CDU/CSU and FDP) nor the opposition (SPD and Greens) will win a majority of seats.
All of the risks I mentioned above revolve around politics. That is both good and bad news. The bad news is that the acts of politicians are sometimes irrational and hard to predict. The good news is that these risks are not inevitable. I still expect positive outcomes from these events and, as a result, prefer equity to other asset classes. But investors should closely monitor the outcomes of these events and keep some cash handy, as market volatility around the outcomes could offer great buying opportunities.

KOMSORN PRAKOBPHOL is a senior investment strategist at Tisco Wealth. He can be reached at www.tiscowealth .com or [email protected].