War And Piece

By Michael Every of Rabobank

Sorry, Bank of Canada (rates held at 2.25%), Chinese CPI and PPI (1.2% and 3.9% y-o-y headline) US CPI (0.5% m-o-m and 4.2% y-o-y headline, 0.2% and 2.9% core), and the ECB today: you all matter but are just pieces of the global picture one now needs to finish: the war vs. Iran.

Changing the recent pattern, President Trump said he would strike Iran again today and did. At time of writing, nearly 50 Tomahawk missiles had been fired alongside airstrikes against radar and drone installations, with a disputed report that a petrochemicals plant was also hit. Even by the standards of the ‘peacefire’ –which, as I’d argued yesterday morning, Iran’s leadership then agreed no longer suits them– this is a major escalation.

However, the US is still holding back compared to what it can do militarily, and Israel is sitting on its hands. Notably, Trump told Fox News he has been in direct contact with senior Iranian leadership, a new development, and they had asked him to stop bombing: to which he claims he told them to sign the deal on the table, or on Thursday evening he will “Bomb the s**t out of them.” In other words, hits against infrastructure, energy, and nuclear sites, can’t be ruled out.

The immediate Iranian response has been to declare Hormuz entirely closed to all ships. However, despite the fact that Iran was prepared for these US strikes there have, as yet, been no successful counterstrikes against US bases in the Middle East or against GCC energy and water infrastructure. Will this happen with a lag? If not is Iran unable to do so, or just unwilling to? Equally, will Iran act with the Houthis to close the Bab-el-Mandeb and Red Sea, making this energy crisis far worse?

These are staggeringly important geopolitical questions on which global markets, and the BoC and Chinese and US inflation, will ultimately pivot.

So far, the market reaction has been relatively mild – oil only up around $2. Perhaps part of that is down to another piece of the Iran puzzle that has befuddled energy experts and visitors from outside the field – what is happening in terms of oil flows from Hormuz.

Trump had yesterday announced the US is taking “millions of barrels of oil” from Iran, causing the usual consternation. A breakdown of what he meant comes from shipping maven As de-dollarisation trends persist, can the yuan take the euro’s place?’, meaning taking the #2 spot in global settlements from the single currency.

In Australia, the political scene continues to churn with talk of a ‘non-compete’ clause and voting preference deal between the centre-right Liberals and populist right One Nation that has suddenly soared in the polls.

In Asia, Taiwan fired US mobile missile launchers into the waters facing China for the first time as “a message of resolve”, according to the Wall Street Journal; the US has asked China to resume rare earth exports to Japan, which have been cut off, as Tokyo pivots to US tungsten scrap exports to fill that gap, and the Democratic Republic of Congo’s curbs on cobalt exports have sparked shortages for everyone, including China; Japan’s parliament passed a revised economic security law to support overseas projects (as Bloomberg asks ‘Who’s Afraid of ‘Japanese Neo-Militarism’? Nobody’ – that’s arguably not true; and BOJ Governor Ueda has been hospitalized and is expected to miss the June policy meeting. Get well soon and perhaps be can follow the Iran news from there.

Indeed, now back to whatever piece of the war you happen to be focusing on.