Markets
Face Additional Risks as Gaza War Enters New Phase
By the
Curmudgeon with Victor Sperandeo
Introduction:
The expansion of Israels ground
operations in Gaza on Friday added more pressure to global markets, which are
already in a strong downtrend. Since the
end of July, global stock markets have lost $12 trillion in value. The S&P 500 has broken multiple support
levels (especially 4200) and is now in correction territory, having lost -10.5%
from its August highs. (Please see charts below).
The major concern has been that
U.S. and other central banks higher-for-longer interest-rate policies may
tip the global economy into a serious recession. But a new concern is if the conflict in Gaza
widens significantly.
Markets face a very challenging
backdrop at this juncture, said Paul de La Baume, investment adviser at BNP
Paribas (Suisse) SA. Geopolitical events are adding more volatility and
reducing visibility.
.
Gaza War Deepens with
Israeli Boots on the Ground:
After ground troops entered Gaza
on Friday, Israel said that it had hit hundreds of Hamas targets, including
missile-launch posts. Prime Minister
Benjamin Netanyahu warned of a long and difficult war on Saturday.
During a Friends of the Israel
Defense Forces (IDF) briefing on Sunday, Major
General Major General Nadav Padan said that the IDF had extended its ground
maneuver in Gaza during the last 36 hours.
More than a few thousand IDF soldiers are now inside the northern part
of the Gaza strip. The IDF goals are to
prepare for a larger invasion and to free the 230 captive hostages that Hamas now
holds within Gaza.
During his distinguished 36 years
of military service in the IDF, Major General Padan has held several leadership
positions, including commander of the central command and head of the cyber
defense directorate.
.
The market has discounted a
relatively moderate scenario, in which the conflict is more or less restricted
to the area, said Francisco Quintana, head of investment strategy at ING
Spain. The tension is enough to raise energy prices, put pressure on inflation,
and prevent central banks from relaxing.
Quintana warned that the
internationalization of the conflict would place us very close to the
scenarios of 1973. That year, members of the Organization of Petroleum
Exporting Countries (OPEC) imposed an embargo against the U.S. after the Arab-Israeli war on Yom Kippur, sending oil prices surging.
That is NOT likely to happen this
time around as Saudi Arabia has not publicly backed Hamas and has been mysteriously
silent on the conflict in Gaza.
Major conflicts involving Israel
and Arab neighbors in this century have had no lasting impact on oil, with
crude prices unchanged in the first 100 days following the conflicts, according
to Marko Papic, chief strategist at Clocktower Group.
As we pointed out in last weeks column, the
real threat to oil supplies, markets and the global economy is if Iran enters
the conflict. It could encourage Hezbollah (its other proxy) to attack Israel
from the north. That could lead to U.S.
military involvement precipitating a full-scale war in the middle east. In that case, Iran would likely block the
Strait of Hormuz which would cause oil prices to double within a very short time.
Few Assets Rise While
Stocks Decline:
Gold has been a big winner since the Israel - Hamas war
started on October 7th, rising almost 10% to more than $2,000 an
ounce. Some commodity currencies, such as the Colombian peso and
Brazilian real, have done well, but the Australian dollar has been basically
flat. As one might expect, the safe haven Swiss
Franc has increased vs the U.S. dollar, but its off its October 21st
high.
.
Victors Comments:
The escalating war in the Middle
East (it could easily expand to include Hezbollah in Lebanon) should put any
Fed rate increases out of the question. The Fed is insignificant compared to the
implications of this war.
The amazing array of pro-Hamas
protests in the U.S. and Europe are a shocking portrayal of the propaganda and
influence the Arab community and Left (anarchists, communists, socialists,
democratic socialists, social democrats, left-libertarians, progressives, and
social liberals) have created against Israel.
It seems that major US and UK
university students have been heavily influenced to hate Israel and Jews. This
could not happen without a great deal of coordination and money behind it!
The October 7th attack
on Israel caused a 2+2 reaction in self-defense after the serial killing and
barbaric, criminal acts of Hamas, including kidnapping (aka taking hostages
to be used as bargaining chips and human shields).
Meanwhile, the Palestinians have
been made to look like the good guys and Israel the bad guys in the last week. The
equivalent would be like the U.S. being wrong for attacking Japan after the
Pearl Harbor sneak attack which killed 2403 sailors, soldiers, and
civilians!
No matter what you believe about
past conflicts between Palestinians and Israel (e.g., two intifadas [1.],
brief wars with Hamas and Hezbollah, etc.), there is nothing that justifies
Hamas brutal October 7th attack by any humanistic norms of the
past.
Note 1. The first
intifada began in December 1987 and ended in September 1993 with the signing of
the first Oslo Accords, which provided a framework for peace negotiations
between Israel and the Palestinians. The second intifada, sometimes called the
Al-Aqṣā intifada, began in September 2000.
Although no single event signaled its end, most analysts agree that it had run
its course by late 2005.
Victors Conclusions:
The war in Gaza is much more
serious problem than just exterminating Hamas. In fact, the problem is far
greater than I and most rational scholars could imagine. It is a foreboding prognosis of the political
and economic future of the world order.
If the UN and world leaders cannot
totally agree on the moral issues involved here, it has to
be for an undeclared and unknown reason.
End Quotes:
If you believe current events
will have a lasting impact on global societies, your required risk premium will
go up, said Jeroen Blokland, head of research firm True Insights. Even
though this impact is not easily measured, it should not be overlooked.
Politics and political currents are becoming more polarized and more extreme.
The third rule of ethics of means
and ends is that in war the end justifies almost any means. Saul Alinsky
.
Be well and keep the faith by ONLY trusting credible and objective news
sources.
Till next time
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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