Typically, equities ignore geopolitical risk unless and until there’s a clear transmission channel to markets.
In that context, it was somewhat unusual to see assets preemptively price what, as of Friday afternoon in the US, was still a hypothetical Iranian counterstrike against targets related to, or inside of, Israel.
Over the past four months, I’ve been fairly adamant about Tehran’s limited retaliation options for a string of assassinations that saw Mossad and the IDF target key personnel in Syria including arms trafficker Seyed Razi Mousavi and Saleh al-Arouri, Hamas’s de facto envoy to Hezbollah.
The problem for Iran is straightforward: Firing missiles into Israel risked IDF strikes inside Iran, something the theocracy surely doesn’t want. Because what then? More strikes inside of Israel? I doubt it. That’d risk a confrontation with big brother.
Until this month, Iran was content to lash out through its proxies — Hezbollah in Lebanon, the IRI in Iraq and, of course, the Houthis in Yemen. But the bombing of the Iranian consulate in Damascus by the IDF was an open-handed slap. The IRGC lost Mohamad Reza Zahedi, the most senior Iranian casualty since Trump assassinated Qassem Soleimani. More than that, the strike was humiliating. Israel plainly feels it can kill Iranian military officials at will and with impunity — even when they’re hanging out in diplomatic compounds. That can’t go unanswered. So Iran spent the last week or so trying to figure out how to retaliate directly without starting a war it can’t win.
Speculation around Iran’s response was widely blamed for a late-week stock selloff that found Wall Street struggling through its worst session in months while the VIX spiked to the highest since October.
Again, it’s somewhat unusual for equities to preemptively price geopolitical risk, but investors have demonstrated some demand for downside protection of late, and I doubt anyone was especially keen to add risk into a weekend with the potential to see an already tense situation in the Middle East escalate further.
At the same time, there were reports that Vladimir Putin may be getting parts for weapons systems from China. I don’t know why I say “may be.” It’s an open secret that Moscow’s received material support from Chinese firms over the course of the war in Ukraine.
Between the heightened geopolitical tensions and inflation data which pushed out Fed cuts into the back half of the year, the dollar benefited from a perfect storm.
This was the best week for the greenback since September of 2022 when the Fed was in “max hawk mode” and the dollar was rising inexorably.
Friday’s allegations against China were in part a recitation of familiar US claims around the witting transfer of so-called “dual-use technology” from China to Russia. But there was more substance this time around. In Q4, the US assessed, Russia got nearly three quarters of its machine tools and almost all its microelectronics from China. Quite a lot of those materials went towards the production of weapons for Putin’s war machine.
The new reports came during a week when Sergei Lavrov met with Xi Jinping in Beijing to discuss, among other things, the two countries’ shared interest in “counteracting” the West.
Like I said, “war’s coming.”
As Niklashausen said in a comment under your “war’s coming” piece, it sure does smell like 1914.
Back then the wealthy assumed both sides had too much to lose from going to war while the lefties counted on trans-national working class solidarity to thwart any efforts by the elite to force them to fight. (Sadly that optimism proved to be very unfounded in practice.)
I’ll defer to you on Iran’s capabilities etc, but it is worrisome when I hear people we listen to shrug off a war in the South China Sea because “China has too much to lose.” Just as Sandam Hussein and Vlad Putin did. Echoes of 1914, no?
Could we be seeing the nightmare scenario playing out before our eyes where the Russia and Iran & their proxies divert US military assets to those theaters all the while exhausting US armaments and determination to respond to a blockade of Taiwan?
Chicken Littles and Cassandras are rarely rewarded in the markets but when they are it’s a bit unpleasant.
The weapons the US has sent to Ukraine – artillery and shells, land based short/medium range missiles, antitank missiles, armored vehicles – are all pretty useless to the Navy.
Not the missiles we are sending to Israel. Note that we quietly told Ukraine “No more Patriot refills” due to supply constraints. A while back the WSJ had a pretty in-depth story about this. A big problem is that the modern naval missiles are more akin to a fighter jet than an old Scud missile. Only one or two can be made per month.
Two recent Bloomberg pieces are worth pondering.
It seems that support for the US tech embargo on China is weakening just a bit as countries start to worry about the impact on their leading exporters. Just as Trump recommended they do at his first (only?) address to the UN General Assembly.
1) By Mackenzie Hawkins, Cagan Koc, Diederik Baazil, and Michael Nienaber
April 12, 2024
US attempts to press the Netherlands and Japan into further curbing Chinese access to semiconductor technology suffered a setback this week, with both nations seeking time for existing limits to take hold — and to see who triumphs in the US presidential election.
The US is urging allies to tighten maintenance for banned gear in China, an effort that includes pushing the Dutch government to stop ASML Holding NV from servicing and repairing restricted chipmaking equipment procured by Chinese companies before the current sales ban. US officials also want Japanese firms to limit exports of some high-end chemicals for chip production.
But both nations are resisting those additional steps, wanting more time to evaluate the impact of export bans on high-end chip-making equipment, according to people familiar with the matter. Another factor is uncertainty about the outcome of the US election in November, according to the people, who described the private discussions on condition of anonymity.
And in the Philippines which is dealing with frequent quasi-military encounters with Chinese vessels there may not be national unity on the need to go to war with China.
2) BY ANDREO CALONZO / BLOOMBERGAPRIL 12, 2024 3:05 AM EDT
Former President Rodrigo Duterte accused the U.S. of inflaming tensions between China and the Philippines in the South China Sea, while criticizing his successor Ferdinand Marcos Jr. of supposedly doing America’s bidding.
“The Americans are the ones pushing the Philippine government to go out there and find a quarrel and eventually maybe start a war,” Duterte was quoted as saying in an interview with Communist Party-run Global Times published Friday. “But I do not think that America will die for us.”
The former president—who brought Philippines closer to China during his term as part his “independent foreign policy”—said that discussions between Beijing and Manila on the sea dispute won’t prosper under Marcos. “You cannot talk to him because it is the Americans that will tell him what he should say to you,” Duterte said, offering to negotiate with China to ease tensions.