Morality Dilemma Amidst War in the Middle East

Hi all,

Our friend Alex S. suggested beefing up the format of the newsletter a little bit. We will dig deeper into the financial and economic impact of each presented news and, more importantly, provide more insights into how each development directly affects you, me, and all our readers.

England managed to get eliminated by South Africa from two World Cups on Saturday - first in the Cricket World Cup and then in the rugby semi-final. I feel kinda bad for England when your former colony outperforms you on the major stage. At least the UK's economy seems not as bad as that of many countries the British Empire had a historical connection with.

Now, let’s get straight to the business, shall we?!)

Markets Snapshot

Global Finance

Oil Prices

Iran's proposal for an oil embargo against Israel resulted in a crude oil price surge, exceeding USD 92 per barrel on Saturday. Oil traders are concerned that the Israel-Hamas conflict could escalate, potentially involving Iran and its allies, including Hezbollah in Lebanon.

Implications:

• The implications are two-folded. The oil embargo itself would have little if any impact on Israel imports because the country does not buy oil from major Persian Gulf producers like Saudi Arabia, the United Arab Emirates and Iran. Israel improts oil mainly from Kazakhstan, primarily through joint ventures with Western companies like Chevron and Exxon Mobil, Azerbaijan and Nigeria.

• On the other hand, increase in global oil prices will continue to have negative effect on the net importers, especially emerging markets in the MENA region. In the last publication, we shown the increasing G-spread for countries such as Jordan, Morocco, and Israel. This growth began with the rise in oil prices in September and accelerated further following the outbreak of regional conflict.

USA - Treasury notes

The US 10-year treasury yields crossed 5% for the first time in 16 years. This was driven by remarks from Fed Chair Powell during his speech at the Economic Club of New York, suggesting that the current policy isn't overly strict and inflation is still too high.

The central bank has taken a strong stance in raising its benchmark rate since early 2022 to curb historically elevated inflation, resulting in an increase in bond yields. While inflation has decreased significantly, guidance from Fed officials and recent robust US economic data indicate that interest rates may need to remain elevated for a longer duration than initially anticipated in order to combat inflation. Additionally, concerns about rising oil prices have contributed to inflation fears.

 Implications:

• The immediate impact will be felt by homeowners and students as mortgage rates and student loans in the US are set to increase. On the flip side, one group that stands to gain from higher yields is savers: high-yield savings accounts, certificates of deposit, and money market accounts are now offering returns of over 5%.

• From a global financial perspective, US yields will be more attractive to investors because in this case, a higher yield does not imply higher risk. Although Fitch downgraded the US credit rating from AAA to AA+ in August, only naive russian newspapers would anticipate a US default on debt payments. Therefore, there aren't significant downside risks for investors considering higher US treasury yields.

Argentina

Argentina's long-standing currency controls may be coming to an end, with presidential candidates Javier Milei and Patricia Bullrich pledging to eliminate multiple exchange rates. The nation, known for regulating the peso's decline and imposing import restrictions to safeguard reserves, currently sees an official rate of 350 pesos per USD, contrasting sharply with the black-market rate of 950 pesos per USD!

Implications:

• The reality is that it is almost impossible to eliminate currency controls with such a wide gap between the two rates. Gradual and structural depreciation of the peso is needed in order to remove the peg and return to a floating exchange rate. A steady depreciation of the currency will also help support a long-run current account surplus of about 1% of GDP. (Remember, a higher exchange rate makes it more difficult to export goods). Unless executed properly, it is merely another bold political statement from the presidential candidates.

Geopolitics

How the West's one-sided support for Israel serves as a leverage point for Ukraine's adversaries (russia & co)

There’s an ongoing concern about American and European diplomats that the Biden administration’s response has failed to acknowledge how its broad support of Israel can alienate much of the Global South. As you would probably expect, a widespread sentiment among Arabs in the Middle East is that the US and other Western powers have never sufficiently held Israel accountable for its treatment of Palestinians and have not given adequate attention to the brutal conflicts in Yemen, Libya and Syria

For instance, the western allies attended the G20 summit in New Delhi just month ago, where they called on developing nations to condemn russia's brital war crimes, especially attacks on Ukrainian civilians, primarily in the interest of upholding the international law.

Many of these officials have reported that they now face similar demands for condemnation, this time regarding Israel's retaliatory assault on Gaza and its decision to restrict water, electricity, and gas supplies in the region. After the hospital explosion on Tuesday (Initially believed to have been struck by an Israeli rocket), which resulted in the death of between 100 and 300 people according to the US intelligence, there was a strong push to condemn Israel's violent retaliation tactics. To be completely fair, the investigation into a devastating blast at a packed hospital in Gaza City is still onhgoing and so far there appears to be no conclusive evidence to determine who was behind the explosion.

Arab nations, led by Jordan and Egypt, are urging Western leaders to take a firmer stance in protecting Gaza's civilian population.They have observed a change in attitude from several Western governments in recent days. Since last week, both the EU and the UK have declared an escalation in humanitarian aid shipments destined for Gaza.

Meanwhile, terroristic russia has departed from its traditional role of restraining its regional allies and, instead, views the current situation as an opportunity to drain US resources and divert attention from Ukraine. There is a lot of wishful thinking for russia&co that the US might not be able to provide both Kyiv and Tel Aviv with weapons, yet there is an element of real concern for Ukraine: The war conflict in the Middle East offers Moscow a convenient distraction while simultaneously undermining the West's stance on Ukraine.