Head of Macroeconomic Research
Summary: Geopolitical risk is all over the place again in early 2020. The Iran-US cold war has replaced the China-United States trade war as investors' main concern. However, we don't think that the situation in the Middle East will lead to a spike in inflation, as feared by stock market bears.
Following the US killing of Soleimani, the situation has considerably deteriorated in the Middle-East. As a consequence of the US strike, the Iraqi parliament voted a non-binding resolution to expel the US military from the country. In reaction, the president Trump threatened to impose sanctions on Iraq without much elaboration. The market impact was immediate: Brent crude price is now back through $70, which corresponds to levels reached after the Aramco facility attacks last summer.
Bears have long feared that a stock market correction could be spurred by an inflation spike and that oil could be the trigger. It is admitted that skyrocketing oil tends to precede recession. However, we don’t see such a situation happens.
It is likely that president Trump is bluffing on Iraqi sanctions. It would be politically risky in a presidential election year to impose sanctions against Iraq, which is the OPEC’s second largest producer, with 4.7 million barrels of daily output. There is simply not enough global spare capacity to fill a gap caused by US sanctions targeting the Iraqi oil production. Higher oil prices would ultimately lead to a tax on US consumers.
In our view, the current market focus on oil price is misleading. We believe that economic damage related to the US-Iran cold war will more certainly come from cyber retaliation or from global uncertainty, with less direct consequences on the global economy.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
