Asset Tapering & Syria Tinkering

<p>Russia’s credibility in the midst of the Syria standoff gets a huge boost as Damascus accepts its proposal to hand in its chemicals stockpile to […]</p>

Russia’s credibility in the midst of the Syria standoff gets a huge boost as Damascus accepts its proposal to hand in its chemicals stockpile to international control and recognize the international ban on chemical weapons. The proposal also gives president Obama and Congress more time, using it as an excuse for members of Congress to avert (or delay) a strike by shifting focus onto the details of the Russian proposal (access to US inspectors, tallying the weapons), without appearing it to be as a vote against Obama.  But the proposal to allow international control of the weapons also gives the White House the power to garner support for a strike, as it includes a diplomatic dimension and shifts emphasis back onto Damascus, if the “international” requirements are not met.

Once the “Russian proposal” is finalized, the US and France will review it before passing it as resolution to their respective parliaments. France is already expected to table a 5-point proposal around the idea of setting up international inspections, controls and dismantling of Syrian chemical weapons.

Several other questions will then arise: Which chemicals will Damascus identify? Will the quantities revealed be consistent to those gathered by US intelligence? Will UN inspectors be allowed the opportunity to inspect for themselves and confirm the revelations of the Assad regime? In the event that chemicals stockpiles are confirmed and revealed, the UN will have to officially request Syria to hand them over to international control.

All of this is expected to prolong into at least month-end as both chambers of Congress negotiate and agree on a final vote. Most likely, they will be rushed into reaching a vote before allowing time for a resolution on the impending debt ceiling deadline around mid-October.

Implications of Asset Tapering  & Syria Tinkering

So far, the market implications of a strike have been generally binary; whereby a looming attack weighs on equities, risk currencies (primarily the euro) to the benefit of the US dollar. Sterling has been spared from the sell-off in risk currencies due to Britain’s isolation from the crisis following the anti-strike vote in British Parliament. The positive impact on USD from a looming strike stems from the equities-currencies chain of reaction.

Combining the FOMC decision of asset purchases into the Syria equation, the US dollar may be in for further losses on the following rationale: The threat of an immediate strike on Syria is averted and the Fed announces a maximum reduction of $10 bln in bond purchases, an outcome that is well priced in the market. Thus, anything less than $10 bn may be deemed as dovish and USD-negative. There is also the possibility that the Fed will use next week’s FOMC meeting to announce a tapering in October or December. As for the Syria factor, the threat can return as fast as it diminishes. President Obama will continue to highlight his ability to order a rapid strike without the authorization of Congress in order to establish leverage with Russia and Syria. So far this has worked in forcing Russia to table its proposal. But it is a fine line between using leverage to force Syria/Russian to cooperate and forcing the use of force in which case the market consequences will reverse.

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