Strictly speaking, it's geopolitics ..... but we all know what geopolitics can do to markets
Monday 9th April 2018
ref : - " Mattis looks isolated as hawkish Bolton arrives" , The Financial Times, International section.
We must confess that it was a surprise to read that John Bolton only officially takes over as President Trump's National Security adviser today. Such has been the speculation over what the appointment of this highly divisive, hard-line hawk may mean for US national security policies that it seems as if he's been in his post a while already. You may remember that Mr Bolton was once the US ambassador to the UN under George W Bush, an interesting appointment in that Mr Bolton was very open about his low opinion of the UN. Whilst he could plainly play hardball pretty well he was nobody's idea of a diplomat with the ability to pour oil on troubled waters if needed, which some might consider another prerequisite for the job.
Mr Bolton replaces General H R McMaster, a more thoughtful and traditional figure and one of the dwindling band in the cabinet advocating restraint in the face of what now seems an inexorable shift in line with the President's own hawkish instincts. Another one given the heave-ho by Mr Trump is Secretary of State Rex Tillerson. Assuming Congress gives the appointment the thumbs-up, Mr Tillerson will be replaced by Mike Pompeo , Director of the CIA and a member of the Tea Party wing of the Republican Party who we can assume will be another hawkish voice in a White House where doves, or even moderates, are already the most endangered of endangered species.
Foremost amongst those that do remain is former four-star general Jim Mattis, the US Defence Secretary. Mr Mattis is likely to be fighting increasingly lonely battles as he seeks to offer a moderating influence in the White House's inner sanctum without his ally Mr Tillerson. Frankly, old Rex will not go down as much of a Secretary of State even with those with similar views to his own. His response was supine at best as the President set about dismantling the influence of the State Department and cutting its budget by a third. But he will be missed by some if only as a supporter to Mr Mattis and as a representative of a more inclusive US view rapidly being discarded by the White House.
You've got to feel for Mr Mattis, and worry about his prospects. The FT quote one long-time Washington insider, admittedly an obvious conservative, who knows both Mr Mattis and the man with whom he is most likely to butt heads, Mr Bolton. Mr Bolton, he says, is a highly skilled if abrasive "machinator" with the ear of the President and will "eat him (Jim Mattis) for lunch. It will be hilarious, I cannot wait". Not really a view of future developments that will leave anybody with a less hawkish disposition than our anonymous observer with a warm and cosy feeling .....
So what might it mean .....? Markets can't get a handle on this looming trade conflict, with risk-off trading strategies being hurriedly implemented every time the rhetoric is ratcheted higher ..... only for some confidence to return whenever an official makes optimistic noises about the two superpowers just jostling for superior bargaining positions. We doubt that anyone can yet predict with any confidence where this will ultimately go . All you can say is that the changing nature of the personnel that Mr Trump is choosing as advisors must to some degree increase the chances of more serious confrontation and decrease those of compromise.
On a broader geopolitical front, the advance of the hawks asks plenty of questions too. Both Mr Bolton and Mr Pompeo have advocated action against Iran (in Mr Bolton's case, regime change), and just like their boss they detest the nuclear deal with Iran. It's hard to see how they could go down the route of back-tracking on that agreement without reinstating sanctions. That is NOT supported by America's allies of course, but that seems unlikely to deter this US administration too much. Mr Bolton has also advocated military intervention in N. Korea, just in case anyone was in doubt as to what sort of tone he is likely to strike.
It's very important to keep everything in perspective , and once again all one can say is that the chances of physical confrontation must, to some degree, be enhanced rather than decreased by the changing make-up of the White House cabinet and the kind of advice they'll give a President plainly not averse to showdowns. The markets may go up and down, but in this environment it might be unwise to get too short of the traditional safe-havens.
And talking of markets, the one likely to be most directly affected by any US / Iran face-off is of course oil. We haven't talked much about oil of late, but from afar it looks to be in a fascinating period. On the bullish side, you've obviously got decent prospects for global growth (at the moment) and the likelihood of the OPEC and Russia-led production cuts being extended. Capping the market is rapidly increasing US shale output and the knowledge that the higher the price, the more will come onstream. It's often been easier to sell rallies in oil in recent years than to buy dips, but right now it seems to us, with regard to what we've been talking about, the risk may actually be on the upside.
The general consensus is that if a trade war kicks off, the negative effect on global growth must be bad for the oil price. That's true of course .... but then again, the type of US administration that is happy to bring on a trade war may very well be one that would be spoiling for a dust-up with Iran. If the US reneged on the nuclear deal, and could get its allies to re-apply sanctions on Iran (that's a big if), a large chunk of supply would be taken off the market.
There are other issues too ..... Houthi rebels in Yemen have been targeting Saudi Capital Riyadh with missiles almost certainly supplied by Iran. Also in the firing line have been oil infrastructure products and tankers, but so far US-supplied Patriot missiles have thwarted the attacks. Meanwhile, Sunni Saudi Arabia is seeking to wrest away some of the influence of Shia Iran in Iraq, itself a largely Shia country. It may sound unlikely but Iraqi Shia leaders have recently been critical of Iran whilst at the same time have been open to a thaw in their relations with the Saudis.
It's hard to argue that the whole Saudi / Iran / Yemen / Iraq thing is anything but a volatile cocktail quite capable of blowing up. Then again, you might also ask when was Middle East politics not like that ? Fair point ..... but the difference could turn out to be that this time, if things go right to the edge, we have a US administration as prepared to stir things up as they are to cool things down.
Mr Bolton replaces General H R McMaster, a more thoughtful and traditional figure and one of the dwindling band in the cabinet advocating restraint in the face of what now seems an inexorable shift in line with the President's own hawkish instincts. Another one given the heave-ho by Mr Trump is Secretary of State Rex Tillerson. Assuming Congress gives the appointment the thumbs-up, Mr Tillerson will be replaced by Mike Pompeo , Director of the CIA and a member of the Tea Party wing of the Republican Party who we can assume will be another hawkish voice in a White House where doves, or even moderates, are already the most endangered of endangered species.
Foremost amongst those that do remain is former four-star general Jim Mattis, the US Defence Secretary. Mr Mattis is likely to be fighting increasingly lonely battles as he seeks to offer a moderating influence in the White House's inner sanctum without his ally Mr Tillerson. Frankly, old Rex will not go down as much of a Secretary of State even with those with similar views to his own. His response was supine at best as the President set about dismantling the influence of the State Department and cutting its budget by a third. But he will be missed by some if only as a supporter to Mr Mattis and as a representative of a more inclusive US view rapidly being discarded by the White House.
You've got to feel for Mr Mattis, and worry about his prospects. The FT quote one long-time Washington insider, admittedly an obvious conservative, who knows both Mr Mattis and the man with whom he is most likely to butt heads, Mr Bolton. Mr Bolton, he says, is a highly skilled if abrasive "machinator" with the ear of the President and will "eat him (Jim Mattis) for lunch. It will be hilarious, I cannot wait". Not really a view of future developments that will leave anybody with a less hawkish disposition than our anonymous observer with a warm and cosy feeling .....
So what might it mean .....? Markets can't get a handle on this looming trade conflict, with risk-off trading strategies being hurriedly implemented every time the rhetoric is ratcheted higher ..... only for some confidence to return whenever an official makes optimistic noises about the two superpowers just jostling for superior bargaining positions. We doubt that anyone can yet predict with any confidence where this will ultimately go . All you can say is that the changing nature of the personnel that Mr Trump is choosing as advisors must to some degree increase the chances of more serious confrontation and decrease those of compromise.
On a broader geopolitical front, the advance of the hawks asks plenty of questions too. Both Mr Bolton and Mr Pompeo have advocated action against Iran (in Mr Bolton's case, regime change), and just like their boss they detest the nuclear deal with Iran. It's hard to see how they could go down the route of back-tracking on that agreement without reinstating sanctions. That is NOT supported by America's allies of course, but that seems unlikely to deter this US administration too much. Mr Bolton has also advocated military intervention in N. Korea, just in case anyone was in doubt as to what sort of tone he is likely to strike.
It's very important to keep everything in perspective , and once again all one can say is that the chances of physical confrontation must, to some degree, be enhanced rather than decreased by the changing make-up of the White House cabinet and the kind of advice they'll give a President plainly not averse to showdowns. The markets may go up and down, but in this environment it might be unwise to get too short of the traditional safe-havens.
And talking of markets, the one likely to be most directly affected by any US / Iran face-off is of course oil. We haven't talked much about oil of late, but from afar it looks to be in a fascinating period. On the bullish side, you've obviously got decent prospects for global growth (at the moment) and the likelihood of the OPEC and Russia-led production cuts being extended. Capping the market is rapidly increasing US shale output and the knowledge that the higher the price, the more will come onstream. It's often been easier to sell rallies in oil in recent years than to buy dips, but right now it seems to us, with regard to what we've been talking about, the risk may actually be on the upside.
The general consensus is that if a trade war kicks off, the negative effect on global growth must be bad for the oil price. That's true of course .... but then again, the type of US administration that is happy to bring on a trade war may very well be one that would be spoiling for a dust-up with Iran. If the US reneged on the nuclear deal, and could get its allies to re-apply sanctions on Iran (that's a big if), a large chunk of supply would be taken off the market.
There are other issues too ..... Houthi rebels in Yemen have been targeting Saudi Capital Riyadh with missiles almost certainly supplied by Iran. Also in the firing line have been oil infrastructure products and tankers, but so far US-supplied Patriot missiles have thwarted the attacks. Meanwhile, Sunni Saudi Arabia is seeking to wrest away some of the influence of Shia Iran in Iraq, itself a largely Shia country. It may sound unlikely but Iraqi Shia leaders have recently been critical of Iran whilst at the same time have been open to a thaw in their relations with the Saudis.
It's hard to argue that the whole Saudi / Iran / Yemen / Iraq thing is anything but a volatile cocktail quite capable of blowing up. Then again, you might also ask when was Middle East politics not like that ? Fair point ..... but the difference could turn out to be that this time, if things go right to the edge, we have a US administration as prepared to stir things up as they are to cool things down.
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