Are markets underpricing geopolitical risks?

Oil prices have actually declined in the wake of Iran-Israel

Author

Paul Della Guardia
April 25, 2024 • Estimated Reading Time: 10 minutes

  • Next steps for Ukraine aid

  • China’s endemic underconsumption: a cornerstone of dollar dominance

  • Results of last week’s WB/IMF Spring Meetings in Washington, DC

  • Coverage of India, Iran-Israel & more

Chart Spotlight: Are geopolitical risks priced in?

In remarks made on Tuesday this week, JPMorgan Chase boss Jamie Dimon stated, among other things, that he’s surprised at oil not rising further amid recent geopolitical tensions.

Brent crude has mostly been trading in the $85-90 range over the past month, though that is still up significantly from around $75 at the beginning of the year.

The man certainly has a point here, especially if energy infrastructure suffers damage in the Middle East and Europe. Yet the Iran-Israel strikes over the past ten days haven’t had a discernible impact.

In fact, oil prices have declined from around $90 to $88 in recent days on the back of slower US business activity and easing concerns over the Middle East. The American cool-off makes good sense, at least.

But with war raging in Ukraine, disruptions to Red Sea maritime traffic, the ongoing Gaza situation, and a series of other conflicts around the world, perhaps markets are becoming desensitized to bad news. At least for now.

In any case, the geopolitical backdrop strikes me as exceedingly gloomy, and perhaps investors are getting complacent about geopolitics, just as they were about inflation around the turn of the year.

Speaking of which, with sticky US inflation and the possibility of another rate rise now on the cards, the double-whammy of an even stronger USD and even higher oil prices would be especially challenging for oil-importing emerging markets. This is not an outcome anyone should want, since the EM/FM universe is awash in dollar-denominated debt.

I’m not the only one in a risk-off mood, with gold currently at record highs. Though skittish sentiment isn’t full-fledged. One of the other main safe haven assets, the yen, is persistently weak, with PMI still below break-even despite some signs of recovery.

I wouldn’t be surprised to see the yen and oil rise in coming weeks given all the smoldering fuses currently inhabiting a geopolitical landscape of powder-kegs.

Deglobalization

  • Ukraine: US passes Ukraine aid package: what now?

  • Europe-Russia:

    • Friends Like These - Doomberg

    • Europe unlikely to tackle Russian LNG imports anytime soon

    • How Brussels Is Plugging Its Loopholes On Russian Sanctions

  • China-Russia:

    • Blinken to warn China over weapons-related exports to Russia

    • Russia Forecasts Lower Price for Its Gas to China Versus Europe

    • Can China compensate for Russia’s losses on the European gas market?

    • The China-Russia trade friendship may not be quite what you think

  • China:

  • US: The overstimulated superpower

  • Red Sea: Mediterranean ports warn of overflowing storage yards in latest threat to supply chain

  • Industrial Policy:

  • Manufacturing: The Politics of Manufacturing Decline

Emerging Markets & Developing Economies

  • IMF/WB Spring Meetings:

    • International Development Association:

      • Banga aims for $100 billion in IDA replenishment

      • The Great Reversal: Prospects, Risks, and Policies in IDA Countries

    • Health:

      • World Bank aims to bring health care to 1.5 billion people

      • World Bank Group Aims to Expand Health Services to 1.5 Billion People

    • New Partnership Aims to Connect 300 million to electricity by 2030

    • New Financing Tools Receive Major Funding Boost

    • World Bank operations:

      • How can the World Bank can be a better partner in global development?

      • Better Bank Initiative

    • Co-financing:

    • Multilateral development banks eye up to $400 billion more lending over 10 years

    • MDBs publish shared vision for circular economy finance at WCEF 2024

  • MDBs: Implementing MDB Reforms: A Stocktake

  • India:

    • Can the Indian Economy Overtake the Chinese?

    • Five Reasons You May Want India In Your Portfolio Now

    • Is India’s BJP the world’s most ruthlessly efficient political party?

  • Egypt: Egypt to Get UK Budget Support to Top Off $57 Billion Global Aid

  • Indonesia: Indonesia raises interest rate to 6.25% in surprise move

  • Brazil: Brazil has underperformed unfairly and is cheap

  • North Macedonia: North Macedonia’s presidential election to test commitment to EU accession

Geopolitics

  • US-Ukraine:

    • US Senate passes $95bn bill including aid for Ukraine

    • ‘A bad day for Putin’: US aid vote gives Ukrainians renewed hope

  • Iran-Israel:

    • Unpacking Iran-Israel

    • Out of the Shadows: Exchanges of Fire Between Iran and Israel

  • Macro: Quantifying the macroeconomic impact of geopolitical risk

  • Moldova: Moldova’s Restive Separatists, Russia Worries, and EU Aspirations

  • Philippines: Calming the Long War in the Philippine Countryside

Thank you for reading the latest edition of the Sovereign Vibe newsletter! Send through your comments and any topic suggestions you have in mind.

Make sure to check out the Sovereign Vibe blog and other newsletter editions.

Scribe’s corner:

Reply

or to participate.