Mohamed El-Erian, chief executive and co-chief investment officer at investment fund PIMCO responds to Sunday’s news that Osama bin Laden, was killed near the Pakistani capital of Islamabad following a “targeted operation” by US forces.
How will global markets react to President Obama’s dramatic announcement tonight of Bin Laden’s death?
Markets will see the news as implying an overall reduction in terrorist threats, the elimination of a specific security risk and, as such, a lowering in the risk premia. In the very short term, it could also involve the possibility of isolated disturbances in some parts of the Middle East and Asia.
Bin Laden’s ability to escape years of pursuit by American and other forces was indicative of a persistent security risk for western interests. As stated by President Obama in his speech, this led his Administration to make Osama’s capture or death the top priority of the war against al-Qaeda.
The announcement of Bin Laden’s death will, and should be seen as eliminating a meaningful component of the global terrorist threat. It will be cheered by many and in many places, accompanied by feelings of achievements, pride and also relief.
There could be a few exceptions to this general phenomenon. Specifically, isolated disturbances are a possibility in some places in the Middle East and Asia.
In net terms, the markets are likely to treat this mix — of a durable reduction in security threats and some possibility of isolated disturbances — as involving a net overall reduction in risk premia. This would bolster equity prices worldwide while placing some pressure on those government bond markets that traditionally benefit from flight to quality.
Oil markets face a more uncertain outlook as, here, the impact of reduced risk aversion interacts most directly with the possibility of some increase in supply concerns.
Importantly, the significance of President Obama’s announcement could go well beyond this by serving as a catalyst for a renewed sense of unity and purpose in the US. Were this to materialize, it would help re-establish some of the key ingredients needed for policymakers to make real progress on a number of critical economic and financial fronts.
The writer is CEO and co-CIO of PIMCO. Some of El-Erian’s earlier commentaries for FT Alphaville are available here.