US May Approve Harder Strikes on Iran if Trump Wins

Israeli Attack on Iran

On Saturday, Israeli warplanes launched an attack on Iran, which was more limited than many had anticipated. Despite this, Israel successfully targeted specific Iranian military points, demonstrating its capacity to strike at Iran's nuclear program or oil infrastructure. The strike was a significant show of force, even if it wasn't the one markets feared. Iran's "ring of fire" around Israel has been extinguished, and its regional reputation has taken a hit. In addition, its ability to provide Russia with war materials has been affected. Iran now has to decide whether to deescalate its focus on Israel or escalate, particularly by pursuing a nuclear weapon. Biden had already pledged US military aid to Israel in exchange for a strike that wouldn't disrupt the election, but after the strike, the situation could change.

US Green Light for Further Strikes

If Trump wins the election, the US might give Israel the go-ahead to strike Iran even harder. If Harris wins, Israel might decide to act without US approval during Biden's lame-duck period. Oil prices dropped by more than $3 per barrel this morning, and the weekend's events might bolster risk appetite. For now, oil prices are down, but the geopolitical tension between Israel and Iran remains unresolved.

Political Instability Globally

The dollar's strengthening is likely due to increased political instability worldwide. In Georgia, the largest ruling party, Georgian Dream, which is friendly to the Kremlin, won 54% of the votes. The Georgian President, who supports closer ties with the EU but lacks political power, described it as a "Russian-style election". It seems unlikely that Europe can expect much rapprochement from Georgia in the near future. Bulgaria, which just held its seventh election in four years, is in a similar situation. The Gerb party won with only 26% of the votes, and the runner-up party received just over 15% of the votes. The two parties together would not have a majority. The third party, a far-right group, is friendly with the Kremlin, and there are several smaller parties. Therefore, political stability in Bulgaria appears to be far from guaranteed.

Political Shock in Japan

Over the weekend, Japan entered a new phase of political uncertainty. The LDP and its coalition partner, Komeito, lost a significant number of seats in the election held on Sunday. With 215 seats (down from 279), they fell short of the 234 required for a majority. The main reason for calling the election was a slush-fund scandal that the LDP has been trying to distance itself from. Prime Minister Ishiba, in search of a majority coalition, may not want to rely on some LDP members who were expelled from the party and became independent members of parliament. To form a stable coalition, the Prime Minister will likely have to expand his coalition, which will be difficult given the number of seats he needs and the fragmented political landscape beyond the main opposition party, CDP, which secured 148 seats. Another option would be a minority government with limited partner agreements. Regardless of Ishida's next steps, it appears likely that the recent policy direction, which included a focus on restoring public finances, will come under pressure. Opposition parties have been advocating for more fiscal support for households struggling with higher bills as wage increases have not kept pace with the cost of living. Moreover, Japan's more hawkish stance on defense and international partnerships with NATO members and even the BoJ's plan to gradually return to a more normalized monetary policy are likely to be challenged.

Market Responses

Market implied policy rates suggest a hike this week is quite unlikely (a less than 5% probability), but also for December the market only sees some 20% likelihood of a hike. Reflecting uncertainties, the yen fell to its lowest level against the dollar since the end of July, with USDJPY nearly hitting 154 this morning. This is likely to draw increased attention to the BoJ’s rate setting meeting this week.

Bottom Line

These events highlight the intricate and volatile nature of global politics and their impact on the economy. The potential for further military action against Iran, political instability in Georgia and Bulgaria, and the political shake-up in Japan all have significant implications for international relations and the global economy. What are your thoughts on these developments? Share this article with your friends and let's discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.