Emerging markets suffered their biggest fall in four months on Monday as Chinese stocks slumped by 7 percent and deteriorating relations between Saudi Arabia and Iran drove Saudi foreign exchange forwards close to a 16-year high.

The fall in mainland Chinese stocks meant a bumpy start to 2016 for global markets. The decline was big enough to trigger a new “circuit breaker” in Beijing on the first day that it came into effect.

The sell-off followed weak manufacturing surveys which soured hopes China’s economy would start showing signs of improvement after a rough past six months.

Analysts also cited the imminent end of a ban on major shareholders selling stocks and changes to IPO regulations which could make it easier for companies to list, increasing supply.

Other Asian stocks followed Chinese shares lower. Indian stocks fell almost 2 percent to their lowest in nearly two weeks after manufacturing activity there contracted for the first time in more than two years.

We live in an economically interconnected world. When Asia, Europe or North America sneeze the rest of the world catches a cold. The specific issue with China is the need to convert their economy from export driven to consumer driven. Part of that process will require letting their currency float to a market driven level and that means letting the yuan fall substantially in the months ahead. A weaker Yuan will make Chinese products more competitive and could cause a trade war with China and the EU and USA. Meanwhile the price of oil is nearly at rock bottom and there is more trouble brewing in the Middle East.

Saudi Arabia, Iran and the Price of Oil

Saudi Arabia can pump oil cheaply as opposed to fracking of oil shale deposits in the USA or offshore drilling almost anywhere. They are still making money when a barrel of oil sells for $35 and may end up driving many drillers, oil exploration companies and even big oil operations out of business. Iran is complying with its agreement to back away from the production of materials for a nuclear bomb and sanction will be lifted letting them export oil again in large quantities. When will the big producers cut back to match current demand and let the price of oil rise? Oil will be one of the unstable markets for 2016 especially as Iran and Saudi Arabia are at swords points over political issues. CNN Money reports that Saudi Arabia cuts ties with Iran.

Oil prices were volatile Monday after Saudi Arabia severed diplomatic ties with Iran. The two countries have long been at odds, but Saudi Arabia’s execution of Shiite cleric Nimr al-Nimr on Saturday kicked off a new round of sparring between them that marks a dangerous shift in an already volatile region.

Al-Nimr was a fervent dissident against the Sunni Muslim Saudi royal family and called for their deposal during the Arab spring uprisings in 2011. After his execution, the Saudi embassy in predominantly Shia Tehran came under attack.

Geopolitical tensions in the Middle East typically cause prices to spike as traders worry about supply disruptions.

Armed conflict between these two nations would be devastating to oil production and would drive prices substantially higher.

US Stocks Futures

The market does not like uncertainty. This is seen as Dow futures plunge in response to a falling Chinese market and news from the Middle East. Market Watch looks at US stocks in this regard.

U.S. stock futures were sliding and pointed to a sharply lower open on Monday following a market rout in Europe and Asia, where a plunge in Chinese stocks triggered a trading halt. Investors also monitored developments in the Middle East, where a rift between Saudi Arabia and Iran raised concerns about further disruption to oil prices.

Will 2016 be the year of unstable markets? If that is to be the case investors will be wise to keep many of their positions short or protect themselves with options. As always do your own homework before investing.

Will 2016 Be the Year of Unstable Markets? PPT

Russian warships in the Caspian Sea fired cruise missiles as Syrian government troops launched a ground offensive Wednesday in central Syria, in the first major combined air-and-ground assault since Moscow began its military campaign in the country last week.

The missiles, launched from a Russian flotilla in the Caspian Sea, travelled 1,400 kilometers (900 miles) over “unpopulated areas” to target militants, according to a Russian officer.

The latest developments – exactly a week after Russia began launching airstrikes in Syria – add a new layer to the fray in the complex war that has torn this Mideast country apart since 2011.

Moscow has mainly targeted central and northwestern Syria, strategic regions that are the gateway to President Bashar Assad’s strongholds in Damascus, and along the Mediterranean coast. But the strikes appear to have given Assad new confidence to try to retake some lost ground.

The Assad family has ruled Syria by way of the Baath Party for decades. When Syrian citizens in the city of Homs peacefully demonstrated in 2011 the demonstrations were put done forcefully and thereafter the demonstrators took up arms and thus began a 4 year long civil war. More than 4 million people have fled the country and a quarter million people have died. The Assad government only controls about a tenth of Syrian territory but most of the population. Kurdish forces have staked out territory in the north and east of the country and a terrorist state, the Islamic Republic of Iraq and Syria has sprung up and controls most of northern and eastern Syria as well as large parts of Iraq. Russia has always backed the Assad dynasty and Russian president Putin contends that the Assad government is the only thing left before total chaos in the region. Thus Russian bombers and missiles are used in supporting a new ground offensive in Syria with the goal of saving the Assad regime. What does all this have to do with markets?

A Powder Keg on Top of a Pool of Oil

The risk to governments in the Middle East is not the Assad regime but various terrorist organizations with the Islamic State as the foremost. Half of the recoverable crude oil in the world is in the Middle East. If unstable governments fall and chaos reigns, oil supplies will fall, prices will rise and economies will suffer. On the other hand countries like Venezuela, Colombia, Mexico, Brazil, Nigeria and Angola will prosper because they will not be subject to social and political chaos and they have oil to sell. In addition, as developing economies based on oil fall into chaos those who do business with them suffer as well.

Germany Feels the Effects of Reduced Developing Market Demand

Bloomberg Business reports that German industrial output fell by 1.2% last month.

German industrial production unexpectedly declined in August, signaling that Europe’s largest economy is vulnerable to risks including weaker growth in emerging markets.

This is happening simply due to slower global growth, especially in China. If the Middle East truly descends into chaos the effects on industrial production and services will be felt globally with stock and commodity markets affects across the globe.

Hoping Russia and Syria Win

An accurate consensus is that the Assad regime is a brutal dictatorship. The USA and EU as well as neighboring Turkey and other regional powers want him to be gone. The problem is that there is not viable alternative. Russia is engaging in realpolitik, the German word for a realistic and practical approach to solving regardless of moral concerns. Newsweek writes about how Putin wins in Syria.

At a moment when the United States appears to be washing its hands of the increasingly bloody and chaotic region, it gives Russia an expanding military presence in the Mediterranean on the doorstep of a NATO ally (its newly established airfield at Latakia in eastern Syria sits just 75 miles from the border with Turkey), and the gambit may yet serve as leverage with the West as Putin seeks to get out from under economic sanctions imposed as a result of Moscow’s annexation of Crimea in Ukraine.

The only hope for the Assad regime is that a combination of Russia, Iran and Hezbollah will help reestablish control. This will probably calm the markets for the time being despite being a morally repugnant solution.

Russia, Syria and Markets PPT