Biden's Approach to Israel Conflict Could Lead to Increased Risk of New Outbreak
Authored by Michael Every of Rabobank
Rate Cuts and Global Backdrop
Yesterday, the Riksbank in Sweden reduced rates by 25bp to 3.75% for the first time since 2016, parallel to Brazil's expected 25bp cut to 10.50%. The Bank of Japan also hinted at a possible small hike in June. These rate cuts come just a month before the European Central Bank is anticipated to do the same. As Bloomberg highlighted, these decisions indicate that domestic issues, including declining inflation and a faltering economy, are prioritized over potential repercussions such as a weakening korona that could drive up import prices. There's also the concern that rate cuts might trigger local speculation and inflation, or that the global situation might take a sudden turn for the worse, complicating the inflation scenario for everyone.
Biden's Warning to Israel
The headlines reveal a situation that could potentially lead to such a development. For instance, US President Biden has warned Israel that he will stop the supply of US weapons if it invades Rafah. This doesn't only apply to the $260m of munitions currently on hold despite Congressional approval, but also to most offensive weapons. However, defensive systems like iron dome interceptors will continue to be supplied.
The Impact of US Action
The ongoing conflict between Israel and Hamas is a complex issue, passionately debated from both sides. However, the US's action could have significant geopolitical and market implications. The US is attempting to dictate Israel's policy, but this move may be too late to satisfy those against Israel. It also removes the last leverage to compel Hamas to release the remaining Israeli hostages, which includes dual US citizens, thus upsetting the pro-Israel crowd. This situation is seen as a significant political victory for Hamas, leaving Israel with only the recent Hamas-drafted deal that could lead to a longer hostage situation, regain control of Gaza, and facilitate the release of high-profile Palestinian prisoners into the West Bank.
The US Strategy and Its Potential Consequences
The US's strategy of favoring defensive actions over offensive ones mirrors their unsuccessful attempts with Russia and Iran. Saudi Arabia might question the value of a defense alliance with the US if their future actions could be restricted by the White House National Security Advisor. Other allies across Europe and Asia might also start questioning the US's reliability in critical situations. Israel, considering this as a matter of existence, might disregard the US, causing a rift between key allies. Alternatively, Israel might decide to attack Hezbollah in Lebanon, which could lead to a more destructive and destabilizing conflict.
Market Implications and the Risk of a Fresh Eruption
In terms of market implications, this doesn't immediately affect energy prices. Some might even misinterpret it as a signal for "de-escalation". However, the underlying geopolitical tension has significantly increased, raising the risk of a new outbreak with potential inflationary impacts.
IMF's Gopinath's Statement
Gopinath from the International Monetary Fund (IMF) recently suggested a world divided into three blocs: a US-leaning bloc, a China-leaning bloc, and a bloc of nonaligned countries. She emphasized the importance of "connector countries" like Mexico and Vietnam as key intermediaries between the US and China. She also noted the signs of a real embryonic geopolitical and geoeconomic rupture.
Fragmentation of Trade and Its Consequences
The IMF predicts that this could reduce world GDP by 0.2% in a mild scenario and up to 7% in an extreme scenario. Low-income countries could experience four times the GDP loss of other countries if commodity markets fragment into two blocs. Most of the losses would be due to trade restrictions of agricultural commodities, raising concerns about food security in poorer countries. The fragmentation of trade in minerals for the green transition would also make the already vastly expensive energy transition even more costly.
IMF's Proposed Solutions
The IMF suggests preserving and strengthening the multilateral rules-based global trading system and the international monetary system as the ideal solution. However, given the current situation, achieving this ideal may be difficult. Therefore, the IMF can only recommend maintaining open lines of communication and engagement, working together on areas of common interest, and limiting harmful unilateral policy actions, including industrial policies.
US Presidential Candidates
In other news, US presidential candidate RFK, Junior revealed that he has a dead worm in his brain and suffers from cognitive problems, including short-term and long-term memory loss. However, voters also have the alternative choice of Joe Biden or Donald Trump.
Final Thoughts
All these factors seem to suggest "disinflation and rate cuts". But is it really the right time to take that risk?
Article by Tyler Durden
Thu, 05/09/2024 - 12:40
Closing Thoughts
This article provides a comprehensive overview of the current geopolitical landscape, highlighting the potential risks and implications of the US's approach to the Israel-Hamas conflict, the global economic situation, and the upcoming US presidential election. It's a thought-provoking piece that encourages readers to consider the complexities and uncertainties of these issues. What are your thoughts on these matters? Feel free to share this article with your friends and engage in a discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
