Macro Digest: Middle East in Focus
“I have not been this nervous in my whole career”
By Steen Jakobsen, Chief Investment Officer, Saxo
The dramatic situation in Israel after this weekend's attacks could prove a geopolitical game changer. While the fog of war makes any predictions on what might happen next impossible, the situation should be at the center of our attention as we hope for peace, while also considering the possible impact on financial markets and our portfolios.
This weekend’s attack by Hamas into Israel has now cost at least 1,100 people their lives. 700 in Israel and 400 on the Palestinian side. The situation is tense and many are already calling it the 9/11 of Israel.
There is no doubt for us that the next month or two will see increased focus on the Middle East and the consequences of the situation for energy, politics and especially the dire situation for civilians on both sides. This note is only an attempt to gauge the impact of the situation on financial markets, not to comment on the conflict itself. Rest assure we are as concerned as anyone for the wellbeing of innocent civilians across the region.
The Middle East is of course a key provider of both oil and gas and via the Suez Canal also a critical transport hub for global containers and energy.
The macro impact
- Energy: WTI and Brent are up 3.5% this morning. The market will not want to be short. Net position in the market is short leaving room for upside. See also our commodity strategist Ole S Hansen’s separate report.
- Gold: XAUUSD is up 1.0% in a safe haven bid. The market is very short Gold, but also still cautious with high real rates in the US (which is the main driver of Gold) – We have seen net buying from sovereigns in Asia and believe gold offers good values at these levels ($1,830-1850) in highly volatile and tense situations
- Fixed Income: Small bid across all maturities in fixed income. The June SOFR contract (3-month US rates) is down 6.5 bps in yield, 10Y futures ar bid, but off their overnight highs. We continue to suggest that US 2-year treasury notes are the safest of assets in fixed income:
- USDJPY and EURCHF are the classic safe-havens inside foreign exchange, although USDJPY tends to be rate sensitive (higher yields = lower yen). USDJPY trades almost unchanged 149.15 (vs. 149.35 close Friday). EURCHF sees CHF stronger at .9600 from .9635 Friday.
Market Comment
The market is concerned about the scale of not only operations in Israel’s immediate neighborhood in the Palestinian territories and Lebanon, but also the risk of escalation with Iran due to its sponsorship of forces hostile to Israel. Hence the focus will be on anything Iranian: new political initiatives, sanctions, risk of retaliation on Iran’s infrastructure and general news. Two days into the conflict the big actors China, Russia, Saudi Arabia are all indicating and expressing the need for a peaceful solution. This is good news, but behind the scenes, no one doubts that Russia and Iran have an openly friendly relationship and both support, indirectly or directly, Syria, Hamas, Hezbollah and the PLO.
Fixed Income
2y government bonds remains our go-to investment depending on your currency region – German 2-year bonds for euro investors, US 2-year notes for USD-based investors and 2-year Gilts for UK-based investors.
Equities
Long Energy, defence stocks (unfortunately), cybersecurity, infrastructure and semi-conductors will be overweight sectors. This is not a new allocation for us. Peter Garnry has been highlighting these baskets for all of 2023.
Concerns related to Russia's intentions
Among macro players there is a strong suspicion that that Russia may look to weaponize energy this winter:
- Strategic reserves are at modern historic lows in the US. Reserves are at an all-time high in China, the largest importer of foreign oil.
- The new BRICS countries represent something like 6 of world largest oil producers and two biggest importers. Strong message?
- Russia has had high levels talks with Iran and closed even tighter relationship over the summer.
- Iran is supporting both Hezbollah and Hamas with both weapon and training and as WSJ wrote back in April seems to have been planning this attack.
I have not been this nervous in my whole career
Yes, I am definitively of the “skeptical kind” but this weekend events hit harder because:
- It’s in the Middle East – which means energy impact but also a volatile political regions.
- Reminds me of how 9/11 changed everything for the worse. Distrust, going-alone, with US or against US, profiling of religion, blatant disrespect for individuals, their civil rights and not least democracy
- How immigration became a toxic subject and how it defined the “fringe-political parties” on the far left- and right
- We have highest social inequality in modern history, worst debt load and smallest productivity.
- Markets are richly priced. Too richly. This could – not saying it will – start cascading sell-off based on lack of transparency and visibility on rates, inflation , energy but not least the need for a geopolitical premium.
- This is an issue completely off the market’s radar and the ongoing obsession with the cycle and Fed rates, etc. – key players may feel it is time to head for safety first and reassess. This makes it more important to be agile, flexible and objective.
All in all, be careful and remember standing up for democracy means not only accepting the vote of the majority but also protecting the minorities.
Further comments from Saxo's strats
- Crude oil jumps on fresh supply risks with the Middle East in focus, by Ole Hansen, Head of Commodity Strategy at Saxo.
Apart from crude oil and gold, energy shares are the only clear gainers on what is a ‘risk off’ morning for equity markets - Middle East tensions boost defensive sectors, by Peter Garnry, Head of Equity Strategy at Saxo.
Within equities the four defensive sectors (energy, utility, consumer staples and health care) are all higher and within our theme baskets we expect a positive price reaction in defence, cyber security and logistics
