08/30/2013 03:15 pm ET Updated Oct 30, 2013

Syria: Investors Have "Feelings," Markets Do Not

I've been asked several times in the last few days about how markets "feel" about a possible strike on Syria. In responding, it's important to distinguish between individual market participants and markets as a whole.

Investors have "feelings" on the issue -- how couldn't they given the enormous human suffering in Syria. Markets, on the other hand, don't.

Rather than "feel," markets collectively gauge the probability distribution of potential outcomes and assess the related profile of possible risk and returns (in an absolute terms and relative to what is already priced in). The outcome is reflected in price levels, their volatility and the correlation among different asset classes.

So, where do markets collectively stand on Syria? Here are four things to note as we enter a weekend full of political maneuverings and difficult decisions.

First, as a standalone, Syria would entail few systemic market influences. It is, after all, a small economy with limited international trade and almost no cross-border financial links.

Market sensitivity to Syria comes from the country's complex network effects.

The country is now a battleground for various proxy wars whose potential reach extends well beyond Syria and the region. Moreover, and in addition to massive human causalities, the violence has triggered significant refugee flight into neighboring countries.

As a result of these realities, Syrian (actual and potential) spillovers touch countries such as Iran, Iraq, Israel, Lebanon, Turkey and some of the 6-country Gulf Cooperation Council (Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates).

Second, if you are interested in evaluating where markets are on Syria, your first stop should always be oil prices.

The oil market is perhaps the least-distorted direct indicator at this point. It is also among the first to react.

This is not because Syria is a major oil producer. It is not.

With an estimated daily production of just 50,000 bpd, the standalone impact on global oil markets is a rounding error at best. Rather, Syria influences how markets perceive the security of supplies from other (major producers) in the Middle East.

Earlier in the week, oil prices surged on the view that a strike was imminent and would involve a broad coalition of countries. They subsequently retraced when U.K. Prime Minister Cameron lost the parliamentary vote on the use of force, China and Russia vocally opposed it, and the United Nations asked for more time to complete its investigations.

Third -- and in addition to insights on the collective market assessment of possible timing, breadth and impact of a possible strike on Syria -- oil prices also help in analyzing the potential impact on other assets (including stocks and bonds) and the global economy.

The higher the oil price, the stronger the headwinds facing a global economy that is healing only gradually and is yet to develop strong growth dynamics.

Should global growth slow from here, it becomes even harder to deal with remaining debt overhangs, reduce alarmingly high unemployment, arrest the worsening in income and wealth inequality, and rebalance the policy mix.

Finally, markets also look at Syria because policymakers have fewer tools to offset possible negative economic impact of strikes should they materialize.

History suggests that, whenever foreign policy priorities and immediate economic considerations conflict, foreign policy prevails -- and rightly so. The role of economic policymakers is thus reduced to being quite reactive. And, having already deployed lots of measures to minimize the impact of the 2008 financial crisis, most are less able to rapidly neutralize the adverse impact of external events.

Markets remain in a wait and see attitude. The oil market will continue to be among the first to reflect changing collective assessments of the timing, scale and scope of strikes. Other markets will also respond, but their signaling will be less direct reflecting the unusual list of other economic, financial, political and policy uncertainties.