In the past few weeks, European sovereign debt issues have been hogging the spotlight. Contagion fears have been reignited, which has resulted in a widespread case of risk aversion.
The global economic situation looks extremely bleak now and you might think that it can’t get any worse, but you can’t be more wrong. Below are 3 more risks that could put additional downward pressure on market sentiment.
Even though it did not show a negative number, the most recent U.S. employment report revealed that employees cut back on hiring in April. They only added 115,000 workers to their payrolls and not 173,000 like initially expected.
The unemployment rate fell slightly to 8.1% from 8.2%, but it was mainly the result of people leaving the workforce. Remember, the unemployment rate only measures the percentage of people who are actively looking for jobs but can’t.
The weak jobs report marked the third straight month that hiring has slowed down. This suggests that the labor market is trending down and that the economy is losing momentum. This was completely the opposite of most economists’ belief that the economy was turning a corner.
If May’s jobs report shows that hiring has weakened further – or worse, has turned negative – it could spook the market and reinforce risk aversion.
U.S. credit rating downgrade
In August 2011, S&P slashed the U.S.’s credit rating from AAA to AA+, citing its ballooning budget deficit as a threat to the economy.
Two months later, Fitch followed suit by downgrading its outlook for the U.S. AAA rating from stable to negative.
I wouldn’t bet on Fitch downgrading the U.S.’s credit ratings before the November elections, but it’s certainly a threat that’s on the horizon.
A downward revision from Fitch would put to question the sturdiness of the U.S. economy and could give rise to another bout of risk aversion.
Increased tension in the Middle East
The West and the Middle East have been working on their differences in recent weeks, but I must say, the tensions remain as palpable as ever. Of course, the root of the problem lies in Iran’s much-protested nuclear program.
Earlier this year, we saw a lot of military posturing in the Middle East as Iran conducted war games, Israel launched its warplanes, and the U.S. sent an aircraft carrier to the coast of Iran. Heads seem to have cooled since last month’s meeting in Istanbul, where Iranian representatives showed signs of their willingness to compromise.
If negotiations fall through in the upcoming meeting that will be held in Baghdad later this month, any goodwill that has been forged could vanish and lead to another risk-off environment.
Of course, market sentiment faces several other risks, but this is my list for now. How about you guys? What do you see as the top 3 things that could fuel risk aversion?