No.Escalation in Markets, Yet
The ‘real world’ where most of us live and work is full of confusion and complexity. But you wouldn’t know that if you just looked at financial markets.
They are sure that central banks are guiding the global economy to a ‘soft landing’ as the Bloomberg chart suggests:
“The Mideast conflict matters to broader markets more or less solely through the lens of whether it could cause an interruption to supply like in 1973. On Tuesday, there were sharp swings from stocks to bonds when the US warned of the attack, and again when the missiles arrived over Israel. But the effects soon eased.”
Unfortunately, this theory ignores the facts of 1973. The Arab Oil Boycott took place because of the West’s support of Israel in the Yom Kippur War. It led global markets to hit all-time lows.
The risk today is actually different and greater. It is that Iran and Israel might go to war, causing the world’s major powers to get dragged in on either side:
- The G7 would very likely continue to align with Israel
- Russia, China and their allies would likely align with Iran
In turn, this would likely cause much greater disruption to the global economy than in 1973.
THE RISKS OF A MAJOR WAR IN THE MIDDLE EAST ARE RISING
Wars generally start in a small way and then escalate. WW1 started with the Austrian Archduke being assassinated in Sarajevo, and ended 4 years later with >9m soldiers having died.
The current conflict has also escalated after the appalling Hamas attack on October 7th, 2023. First Gaza was involved, and then the war moved to Lebanon, as the BBC reports;
“Israel has invaded southern Lebanon in a dramatic escalation of its conflict with Hezbollah. The Israeli ground operation began on Monday night, days after an air strike killed Hassan Nasrallah, the leader of the Iran-backed armed group.”
Now, the conflict threatens to spiral into a major regional war, as The Economist reports:
“The conflicts in Lebanon and Gaza threaten to spiral into a regional war….The risks of any follow-up attack are high. Iran’s arsenal is far more powerful than that of its proxies: it has more than 3,000 ballistic missiles, though not all of them have the range to reach Israel.”
THE UKRAINE WAR ADDS FURTHER RISK
The Ukraine war is already escalating.
It began with Russia’s invasion and attack on Kyiv, which President Putin expected to take 3 days. Today, more than 2.5 years later, Ukraine is firing rockets into Russia, and has occupied some Russian territory.
And the escalation is becoming much more serious. Putin is now changing the rules for nuclear engagement as the BBC reports:
“It is proposed that aggression against Russia by any non-nuclear state, but with the participation or support of a nuclear state, be considered as their joint attack on the Russian Federation.”
In other words, if a Western nuclear state actively supports further Ukrainian attacks on Russian soil, Russia might decide to attack them with tactical nuclear weapons.
THE US ELECTION ADDS FURTHER RISKS
Then there are the risks associated with the US presidential election. It is safe to say that none of us have ever seen an election like it. As the Congressional journal The Hill reports:
“The 2024 presidential race has seen enough shocking events transpire in a few short months to fill an entire calendar year, but that doesn’t mean there won’t be a much-talked about October surprise looming in the final weeks of the campaign.”
Already we have seen the retirement of the sitting president, two attempted assassinations, and countless legal battles over challenges to voter eligibility.
It is also clear that the two candidates would follow very different policies if elected. Kamala Harris would maintain US support for NATO and Ukraine.
But Donald Trump’s support would be much more conditional. And as Politico reports, his aim would be to “cut a deal with Putin over Ukraine”.
CHINA’S SLOWDOWN ADDS FURTHER RISK
Meanwhile, China’s property bubble continues to burst. As the Wall Street Journal reported, China now has 90 million empty apartments as the downturn continues.
Last week, Beijing was forced to announce major new stimulus policies to avoid embarrassment ahead of last Tuesday’s 75th Anniversary of the founding of the People’s Republic of China.
President Xi also emphasised the downside risks, as Bloomberg noted:
“We must be mindful of potential dangers and be prepared for rainy days,” Xi said on Monday in a speech marking the 75th anniversary of the founding of the People’s Republic of China.”
MARKETS ARE IGNORING ALL THESE RISKS
In normal times, markets would have reacted to these risks long ago. But these are not “normal times”.
A whole generation of investors has been brought up to believe that central banks can always keep markets moving higher. “Bad news” is thus good news, as it means more stimulus is on the way.
The real “October surprise” for markets might be to find out that central banks are powerless against today’s major geopolitical risks.