Global equities touched record highs Friday and looked poised to notch the best streak of weekly gains since November (figure below), amid optimism around the world’s two largest economies.
That’s not to say there aren’t concerns. There are. In fact, there are three key geopolitical flashpoints that should be on everyone’s radar. Russia-Ukraine is obviously one. The Biden administration hit Moscow with sanctions Thursday, but they were seen as punishment for past misdeeds — “revenge for Billy Batts, and a lot of other things,” so to speak. The measures were telegraphed to the Kremlin, and weren’t generally viewed as representing any kind of worst-case scenario for Russia. The idea, apparently, was to exact a measure of revenge for hacking, meddling and poisoning, without aggravating Putin enough to prompt another escalation in Ukraine.
Dmitry Peskov on Friday told reporters that Russia is “ready to develop our dialogue as much as our counterparts are ready for it.” “It’s probably very positive that the viewpoints of the two heads of state coincide here,” Peskov remarked, noting that currently, “they do not coincide in their understanding of building relations on a mutually beneficial basis and taking into account each other’s interests.” The jokes just write themselves.
On top of that, there’s Taiwan, reduced to a pawn in the Sino-US struggle for global hegemony. And then Iran, which overnight enriched uranium to 60%, less than a week after an Israeli attempt to sabotage Natanz and amid tenuous talks in Vienna aimed at salvaging whatever can be salvaged of the nuclear pact.
“The escalating shadow war in the region represents the biggest threat to the Iranian nuclear talks in our view. We judge that a major, kinetic Iranian response to the Natanz facility incident will place the talks in far more jeopardy and cause regional tensions to rise appreciably,” RBC’s Michael Tran said.
Tran suggested that Iran’s reaction function could be more restrained now than it was in 2019 (Keyser Soze is dead after all), but he cautioned that “hardliners are unlikely to want to see the political fortunes of moderates bolstered by a revised nuclear agreement [so] a return to the 2019 playbook” isn’t out of the question, even as the bank thinks “the chances of a diplomatic breakthrough resulting in sanctions relief in H2 2021 remain fairly high.”
Of course, geopolitical flashpoints are nothing new, but occasionally it’s worth reminding yourself that the world is a dangerous place. And, contrary to what the nice man with the red hat who you met while golfing in Florida told you, it wasn’t any safer when the occupant of the Oval Office was erratic and prone to fits of infantile rage.
Ironically, the most brazen of Trump’s decisions while in office (assassinating Qassem Soleimani) turned out to be a stroke of strategic genius, but everyone lucks up occasionally. It’s doubtful that Trump conducted a serious cost-benefit analysis and determined that Iran wouldn’t risk all-out war in retaliation. In fact, all indications were that he was encouraged by people who had conducted such analysis not to pull the trigger. He did it anyway. And it worked out from a kind of “shock and awe” perspective. But even as it arguably made the world a safer place in the very near-term, it made things more dangerous than ever over the longer-term, which is a concern for the rest of us, if not for Trump.
Anyway, if a pandemic that killed 3 million people globally isn’t capable of derailing stocks for more than a few weeks, I suppose we’d all be foolish to fret about such “trivial” matters as a new Russian incursion in Ukraine, China subjecting Taiwan to the Hong Kong treatment or Iran pretending like they’re going to build a bomb.
So, onward and upward it is, as we build on the third largest YoY rally in US equities in a century (figure below from BofA’s Michael Hartnett).