Key risk and stress points will be mainly driven by geo-politics and the policies of governments as they move forward in 2011 with their exit strategies from the financial crisis. Other issues that could destabilize the markets will center on the decisions made by the US concerning its fiscal stimulus policy, as well as resolving some of its foreign exchange and trade disputes with China.  Other contributing destabilizing factors will be the fallout over euro zone sovereign debt issues, as well as possible cracks in the coalition government in the UK over their austerity programs. The Korean situation will continue to play hot and cold, but outright war is not expected, given that both Koreas have made their point through belligerent mutual destruction threats. For the GCC region, stock markets will continue to trade within narrow ranges, with the exception of Qatar, where World Cup investment euphoria will propel another round of investment flows and a rise in Qatar inflation.

The Saudi stock market will still see bouts of short term euphoric rallies, followed by sharp retail selling to close 2011 at around the 7400 levels, a situation that will continue until more long-term institutional investors dominate the market and foreign investor participation. Saudi Arabia will also try to contain domestic inflationary tendencies driven by food prices. Oil prices will still trade within the preferred Saudi band of $75-85 per barrel, despite the current $90 plus levels spurred by the unusual winter conditions in Europe and the US. The recent rise in Chinese interest rates to stem Chinese inflation is putting a question mark on further Chinese growth, and oil producers will not wish to be a contributing factor in slowing down any signs of economic recovery in struggling western economies.

The wider Middle East will still have to deal with the outcome of the recent Egyptian parliamentary elections, Lebanese domestic concerns and ongoing stalemate on Iran's nuclear program. These factors will create a drag on foreign bank long term lending to the region, but there will be a pickup in credit to the hitherto neglected but promising economic sectors such as the small and medium sized enterprises (SME's), as countries such as Saudi Arabia focus on employment generation through SME's.

Politics then will still define what is possible in the financial markets in 2011, but the art of politics and compromise will be tested in periods of stress. The G20 managed to patch over some fundamental differences in its November 2010 meeting in Korea, and it will be interesting to see if the high level meetings planned in 2011 between the US and Chinese leaderships will repair some of the rifts or merely cement over them. Global financial power, especially the rate of surplus savings, has shifted to the developing economies such as China and oil exporters, while fiscal deficits and low economic growth has bedeviled the more advanced economies. While the issue of protectionism might raise its head during 2011, this will not be a major one unless a drastic rise in unemployment affects some advanced economies, and the political  pressure to impose tariffs against exporting, mostly Asian countries, becomes too difficult to withstand.

Food price inflation could become a major issue for countries with large capital flows, and other emerging markets that are net food importers, and there could be some interventionist government policies to ease on imported food inflation by imposing price controls, or even outright restriction of exports of some "strategic" food commodities, echoing 2008/2009 food price hikes. For the Gulf and Saudi Arabia, 2011 will continue to witness investment initiatives in agro-food industries and securing supply sources in countries that have excess production capacity.

The euro zone's financial woes will not go away in 2011, and while Ireland was the latest to fall through the eye of the financial storm, there are signs that continued negative market sentiment and downgrades of euro sovereign bonds might herald further massive euro bailouts, putting the leading Euro creditor nation – Germany - under political pressure to continue supporting the euro project as is, or to look at alternative models. Any weakening of German resolve will put pressure on fragmented coalition and minority governments in Europe such as Ireland and Portugal. Although Italy's Berlusconi narrowly won his vote of confidence, he now has less freedom to operate than before, adding to more uncertainty in the financial markets. Other European countries, currently below the headline financial radar, might contribute to yet more financial market jitters, with Belgium with a debt/GDP ratio of 100 percent and still no government, probably a leading candidate. This compares with Saudi Arabia's 10 percent debt/GDP ratio.

The British pound could come under renewed pressure in 2011, as the Conservative- Liberal-Democratic coalition government spreads pain for all though expenditure cuts, but with some in the UK seeing these policy measures as not necessarily equal pain for all. The UK could be set for more trade union and other activists' disruptions. The first true test of public reaction will come in May's 2011 local elections in England and Wales and the referendum on electoral reforms, with the Lib Dems expected to lose out amongst young voters due to their perceived negation on national election pledges on tuition fees.

While most analysts in the Middle East concentrated on the fallout and shifting domestic balance of power in the US between Democrats, Republicans, Tea Party and independents, and whether this provided a clue for a more partisanship or bi-partisanship US government, there has been little analysis of the evolving Chinese governing structure, which has important implications for the global markets in 2011. Basically, the Chinese are handing over power to a fifth generation leadership from the current fourth generation leadership that has steered China on the world stage of being a global economic power. In October 2010, the Chinese Vice President Xi Jinping was appointed to the additional role of vice-chairman of the Central Military Commission, a move that could signal his likely confirmation as President Hu Jintao's likely successor.

The likely succession date is still far away, sometimes between October 2012 and March 2013 when the party meets, but the transition will be smooth as in the previous period of 2002-2003.

In the interim, the Chinese will continue to enhance their 12th Five Year Plan which ends in 2015, and introduce market oriented interest rate reforms and enhance a market-based managed floating exchange rate regime.

The recent raising of Chinese domestic interest rates is one indication of this policy to allow interest rates play a more important role in credit markets. The implication is that China could attract some foreign capital flows, especially from joint venture projects who will invest surplus capital in China, compared with investing in low yield western economies, depending however on Chinese inflation rates and the real rates of return on Chinese investment.

The financial markets will continue to fascinate and scare us in 2011 in equal measure, as the fallout of the 2008 financial crisis lessons are still being digested, but with no easy answers facing the key players....
 
— Mohamed A. Ramady is a former banker and currently a visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran