Monday, Oct 9, 2023

why this weekend changed markets

“There is no sun without shadow, and it is essential to know the night.” – Albert Camus  ||

Hello everyone - a sombre email today, as it’s hard to imagine the terror and heartbreak of all those caught up in this weekend’s events.

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Programming note: it’s a public holiday on Thursday where I live, so this newsletter will be skipping a day.

IN THIS NEWSLETTER:

• Why this weekend’s attack matters more than many realize

• The market reaction

• US treasury issuance ytd

• The problem with solar manufacturing in Europe

WHAT I’M WATCHING:

Why this weekend’s attack matters more than many realize

It’s hard to overstate the significance of what happened in Israel this weekend. This is not just “another” battle far from the seat of finance. It is not just another conflict in a conflict-riddled zone. It is so much more than that, and we will all end up affected one way or another.

Let’s pick apart what this is at first glance (it’s still early in this war, and things are evolving rapidly):

It is the beginning of yet another land war in an area that dominates in certain key commodities.

Israel is not an oil producer, nor is Gaza, but Iran is. Hamas has long had close ties with Iran, from which it has received a constant stream of funding (although sanctions has made this harder) and weapons materials. Tehran has praised the aggression. There are accounts of invading soldiers speaking Farsi. The Wall Street Journal reported this morning that sources within Hamas and Hezbollah say that Iran was involved in the planning of the attack. Hezbollah, also funded by Iran, is reportedly attacking Israel from its base to the north in Lebanon.

As Israel moves to obliterate Hamas in Gaza, what will Iran do?

If proof emerges that Iran had a hand in the invasion, what will the US do?

The US has recently been turning a blind eye to Iranian oil exports, as a way to keep supply flowing and the oil price down. It has also been working with Saudi Arabia and Israel on a peace agreement, which would be a historic deal between sworn enemies. Saudi Arabia signed a peace agreement with Iran earlier this year, but they don’t exactly like each other.

It is unclear as to who Saudi Arabia would side with if pressed to choose, but history and recent comments swing the scales more toward Iran, unless the US can bring sufficient incentives to do otherwise.

Any escalation of tension in the Middle East could impact oil supply lines and/or make the pipelines that criss-cross the region vulnerable. Part of the US response could be heavier sanctions, perhaps this time not just against Iran but against anyone that sides with it.

And given the likely scope of the Israeli reaction, most neighbours in the region will probably have to end up choosing sides.

It is yet another powder keg that will draw in the world’s superpowers.

Speaking of choosing sides, it is not hard to see how the US, Russia and China will align. The US has already loudly proclaimed that it will stand with Israel. Russia won’t, despite the significant number of Russians living there. Russia will side with Iran, as will China.

This conflict will complicate domestic US politics. There have been signs recently within the US that support for Ukraine has been wavering. Hamas and Iran have no doubt noticed, and the possibility that the US can’t or won’t come to Israel’s aid could have played a part in the final decision to invade. It’s also possible (this is speculation on my part) that the timing is not just about the anniversary of the Yom Kippur war or the start of the Jewish sabbath. It could also be that it was timed to coincide with what would have been the end of the first week of a US government shut-down. Just imagine that image: a war breaks out in a strategic ally country, while the US government is paralyzed by internal budget dysfunction.

Israel will need US aid for the upcoming battle. There are significant stockpiles of US weapons within Israel. Will the US Congress authorize their use? What if they’re not enough, what if Iran sends more weapons to Hamas and Hezbollah? What will this mean for aid to Ukraine?

What is China thinking right now? How might this impact its “naval exercises” around Taiwan?

Hamas’ move is also likely to blow any US restraint on defense spending out of the water. In other words, there goes the budget deficit, up goes the necessary borrowing… at much higher interest rates. Oil prices won’t be the only market barometer jumping. Watch those US yields as well.