Most Dangerous Time
Doug Nolan
Perhaps it goes back to a passage I recall reading years ago that recounted the 1929 experience: “Everyone was determined to hold their ground.
But the ground gave way.”
Difficult this week to shake that foreboding feeling.
It’s as if things barely clinging together started to come loose – a most tenuous stasis about to spiral out of control.
Global markets.
Gaza, Israel, the Middle East - and a hostile world.
In a barbarous terrorist attack reminiscent of the worst of ISIS, 1,300 Israelis were lost.
Men, women, children, and babies executed in the most ruthless and despicable manner imaginable.
It’s being called “Israel’s 9/11.”
I recall the outpouring of global support America received following the 2001 terrorist attacks.
Traveling in Brazil at the time, I was touched by the sincere sympathies expressed (including agents at the Sao Paulo airport upgrading my seat to first class for a flight to Europe).
It would be reasonable to assume that the world would today offer condolences and overwhelming support for Israel.
But it’s a different country and a different, more hostile, era.
In a deeply divided world, Israel and the Palestinian cause are the hottest of hot button issues.
A single headline provides a woeful testament: “New York Jews ‘Feel Like They are Being Hunted Down’ on Global ‘Day of Rage’.”
The U.S. and a few others offer unyielding support.
Many nations seem ambivalent, and even more focus on Palestinian civilians trapped in Gaza Armageddon rather than the tragic loss of life in Israel.
Moreover, sentiments fall closely along pro- versus anti-U.S. lines.
The world changed last Saturday – and it was yet another dramatic change for the worse.
There have been too many of these, and they’re hitting like a bat out of hell.
The pandemic, Russia’s Ukraine invasion, China’s powerplay, and now the Israel/Gaza War.
It’s dizzying and disruptive.
Moreover, these shocks are exacerbating divisiveness within universities, communities, societies, and the global community.
They’re illuminating and intensifying the ongoing pandemic of political dysfunction.
And from this week’s reactions of leaders and nations, there is confirmation of profound world change – of new world disorder.
For fragmenting global systems, it’s not easy to think of an issue more polarizing than Israel’s callous assault on Gaza for the eradication of Hamas.
Friday from Prime Minister Benjamin Netanyahu: “We are striking our enemies with unprecedented might.
I emphasize that this is only the beginning.”
October 8 – Wall Street Journal (Summer Said, Benoit Faucon and Stephen Kalin):
“Iranian security officials helped plan Hamas’s Saturday surprise attack on Israel and gave the green light for the assault at a meeting in Beirut last Monday, according to senior members of Hamas and Hezbollah…
Officers of Iran’s Islamic Revolutionary Guard Corps had worked with Hamas since August to devise the air, land and sea incursions—the most significant breach of Israel’s borders since the 1973 Yom Kippur War—those people said.
Details of the operation were refined during several meetings in Beirut attended by IRGC officers and representatives of four Iran-backed militant groups, including Hamas… and Hezbollah, a Shiite militant group and political faction in Lebanon, they said.”
The Wall Street Journal report of Iranian Revolutionary Guard officers meeting with Hamas and Hezbollah to plan attacks against Israel stoked fear of an expanding Middle East war.
Quickly, U.S. officials downplayed this reporting, stating U.S. intelligence had no evidence of Iran’s direct involvement.
Israel officials began the week similarly cautious.
And with little indicating Hezbollah’s imminent involvement, U.S. stocks reversed Monday morning losses to post solid gains for the session.
Stocks then rallied sharply Tuesday, closed higher on Wednesday, and traded to the week’s highs mid-session Thursday.
After being under serious pressure the previous week, Middle East tensions provided Treasuries desperately needed safe haven demand.
While the cash market was closed Monday for holiday, bond futures pointed to a strong rally.
And at Tuesday’s lows, yields were down 18 bps, surely fueled by short covering and the unwind of hedges.
Ten-year Treasury yields closed Wednesday at 4.56%, down 24 bps w-t-d.
Thursday’s trading session is worth documenting.
After trading down to 4.52%, 10-year yields reversed sharply higher – closing the session 18 bps off lows at 4.70%.
Volatility was even greater for the 30-year Treasury bond.
Trading as low as 4.67% in early trading, poor PPI data and a dreadful auction saw yields spike a notable 21 bps – before closing the session up 16 bps at 4.89%.
If a global crisis can’t sustain a Treasury rally (from such “deeply oversold” conditions), what can?
Thursday’s disorderly trading had traders on edge.
I’ll use “ominous” to describe Friday’s disorderly trading.
Gold surged almost $64, or 3.4%, to $1,933, the largest one-day gain since (banking crisis) March 17th.
Silver jumped 4.1%.
Crude (October contract) surged $4.78, or 5.8%, to $87.70.
It was fascinating to watch safe haven attributes materialize with some urgency.
Treasuries also benefited from safe haven demand, though Friday’s nine bps decline in 10-year yields (4.61%) was rather unimpressive compared to the ascending precious metals.
Moreover, the metals shined even though the dollar traded slightly higher in Friday trading.
At Thursday’s intraday highs, the S&P500 enjoyed a 1.8% w-t-d gain, though end-of-week selling cut this advance to 0.4%.
A lot is riding on the big tech stocks (“magnificent seven”).
By week’s end, many financial conditions indicators had reversed early-week “risk on” moves.
Both U.S. investment-grade and high yield corporate CDS closed the week higher.
Bank CDS bucked the trend, with Friday’s solid earnings reports sustaining early week CDS declines.
Emerging Market CDS shot higher, with a notable nine bps jump Friday to 237 bps.
Israel CDS rose 13 Friday (33 for the week) to a decade-high 133 bps.
The Friday surge in Middle East sovereign CDS contributed to a portentous session.
Qatar CDS rose seven (up 16bps on the week) to a one-year high 62 bps, and Saudi Arabia five (9bps) to a 14-month high 69 bps.
Bahrain rose seven (16bps) to 255 bps; Dubai nine (14bps) to 92 bps; and Kuwait two (11bps) to 64 bps.
October 13 – Reuters (Aziz El Yaakoubi and Parisa Hafezi):
“Saudi Arabia is putting U.S.-backed plans to normalise ties with Israel on ice, two sources familiar with Riyadh's thinking said, signalling a rapid rethinking of its foreign policy priorities as war escalates between Israel and Palestinian group Hamas.
The conflict has also pushed the kingdom to engage with Iran.
Saudi Crown Prince Mohammed bin Salman took his first phone call from Iranian President Ebrahim Raisi as Riyadh tries to prevent a broader surge in violence across the region…
‘Normalisation was already considered taboo (in the Arab world)… this war only amplifies that,’ Saudi analyst Aziz Alghashian said.”
Many have suggested Hamas was motivated to attack Israel to quash Saudi/Israeli reproachment.
Yet with reports of Hamas having planned for these attacks over a two year period, recent Hamas, Hezbollah, and Iranian collusion point to greater ambitions.
October 13 – Associated Press (Bassem Mroue):
“Iran’s foreign minister warned Friday that if Israel’s attacks on the Gaza Strip don’t stop immediately, the violence could spread to other parts of the Middle East.
Hossein Amirabdollahian is on a tour that took him to Baghdad before Beirut, and later in the day he went to the Syrian capital, Damascus.
Iran heads the so-called ‘axis of resistance’ that includes powerful militant groups in the region, such as Hezbollah in Lebanon and the Popular Mobilization Forces in Iraq.
Amirabdollahian spoke… after a meeting with his Lebanese counterpart, during which the two officials called for an end to Israel’s attacks on Gaza.
He also met with Hezbollah leader Hassan Nasrallah, as well as caretaker Prime Minister Najib Mikati and the speaker of parliament.”
October 13 – CNBC (Emma Graham):
“An exchange of fire between Lebanese militant group Hezbollah and the armed forces in northern Israel signal that the conflict in Gaza could spread regionally.
With an Israeli ground incursion potentially imminent in the north of the Gaza Strip, the conflict could grow to involve other regional actors, including Hezbollah and potentially Iran, analysts say.
And if Hezbollah decides to join the conflict in neighboring Israel, ‘it will be nothing short of a game-changer,’ Firas Maksad, a senior fellow at the Middle East Institute, told CNBC…
Hamas is but the weak underling of Hezbollah, a much more formidable fighting force and widely recognized as the most powerful nonstate military in the world,’ he added.
‘This will be a game-changer, not only for Israel, but also for the entire region.’”
Ramifications of an expanding Middle East conflict are almost too disconcerting to contemplate.
Hezbollah opening a northern front against Israel would increase the likelihood of Israel directly confronting Iran.
And there’s the festering issue of Iran’s nuclear capabilities.
The presence of the USS Gerald R. Ford Carrier Strike Group in the Eastern Mediterranean is surely meant to deter the Iranians and Hezbollah.
Russia’s recent alignment with Iran is an issue, along with Putin’s craving to obstruct U.S. aims.
There’s Assad’s Syria infested with scores of hardened militant groups.
And there are bitter Shia/Sunni rivalries with scores to settle, along with “enemy of my enemy” anti-Israel alliances.
Israel has few friends in a dangerous neighborhood – with the U.S. not much more popular.
The region is still a dominant oil producer.
The bottom line: the Middle East is today a more combustible tinder box than ever.
And the region caught fire last week.
If a major conflict takes hold, I wouldn’t bet against an opportunistic Putin causing the U.S. as much grief (in the Middle East, Europe and elsewhere) as he can muster.
And why wouldn’t Kim Jong Un rattle his nuclear saber more alarmingly?
And surely Xi Jinping would relish the opportunity to spread the U.S. military even more thinly – in the South China Sea and the Taiwan Straits.
Markets have been content to ignore mounting geopolitical risks.
Friday had the look of some reality beginning to set in.
October 12 – Reuters (Jeff Mason and Steve Holland):
“U.S. President Joe Biden will release his supplemental funding request next week, White House spokeswoman Karine Jean-Pierre told reporters… without giving more details.
A person familiar with the matter previously told Reuters that the Biden administration is planning to ask Congress for additional money for military aid for Israel after Saturday's attack by Hamas militants and for Ukraine…”
The week began with safe haven Treasury buying stirring imaginations of sinking market yields and a never-ending equities bull market.
The reality is massive government deficits (Treasury supply) as far as the eye can see – and that’s before what will surely be a major increase in defense spending and ongoing support for our allies at war and in need.
Haven buyers beware.
And so much political dysfunction.
Hopefully, House Republicans can elect a Speaker well ahead of the November 17th continuing resolution deadline.
Divided party, divided Congress, divided government, divided nation, and divided world.
All deeply divided, nonetheless.
Friday’s report on University of Michigan Consumer Confidence had one-year inflation expectations jumping from 3.2% to a five-month high of 3.8%.
This followed Wednesday’s stronger-than-expected 0.5% increase in Producer Prices, with worrying 1.8% (0.5%, 0.7% and 0.6%) three-month inflation.
And Thursday’s CPI was reported at a stronger-than-expected 0.4% for the month (following August’s 0.6%).
Inflation is demonstrating unmistakable persistence, with Middle East instability posing a clear and present danger of higher crude prices.
Moreover, an increasingly fragmented global economy elevates the risk of supply chain issues and resource scarcities.
The Middle East crisis hit with incredibly inopportune timing.
Global de-risking/deleveraging had already gained significant momentum.
Thinking ahead, it’s anything but clear how the Fed and global central bank community will respond to market illiquidity and dislocation.
At this point, massive liquidity injections would be required to reverse a serious de-leveraging episode.
With inflation risk highly elevated, I assume central banks will approach additional QE cautiously.
And when they’re forced to move aggressively, the bond market’s reaction will be both fascinating and highly consequential.
It's a different bond market these days, with this New Paradigm trading dynamic.
Bonds may protest another big QE program, with economies in the throes of heightened inflation risk.
A Middle East crisis and heightened geopolitical risk will likely only promote greater deficit spending at home and abroad.
October 10 – Bloomberg (Tom Hancock):
“A rare mid-year revision to China’s national budget to juice the economic recovery with more stimulus would signal top leaders are moving away from a growth model that has piled ever more debt on local governments.
That’s the verdict among economists after people familiar with the matter said policymakers are considering raising the budget deficit for 2023 by issuing at least 1 trillion yuan ($137bn) in sovereign debt for infrastructure spending…
China has for years been loading debt on the balance sheets of local governments and companies they own to fund infrastructure spending…
Putting more of the fiscal burden on the central government would underscore President Xi Jinping’s need to counter an economic slowdown, while also highlighting growing concern among authorities…”
The Bloomberg headline “China on Brink of Deflation Again…” notwithstanding, the great Chinese Credit Bubble is alive and unwell.
About 12% ahead of estimates, Aggregate Financing expanded $564 billion during September.
This put nine-month growth at $4.01 TN (11% annualized), just short of 2020’s record pace.
And with an increasingly desperate Beijing poised to aggressively borrow and spend, 2023 will likely post record annual Credit growth (of atrocious quality).
Beijing is playing with fire.
When I ponder things at risk of spiraling out of control, China’s currency is high on the list.
“The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships.
This may be the most dangerous time the world has seen in decades.”
Jamie Dimon, October 13, 2023
0 comments:
Publicar un comentario