For this week’s newsletter, we touch on topics from tensions in the Middle East, US market trajectory, developments in the Ukraine-Russia war, and investment opportunities in commodities. First, we look at the undeclared ‘Shadow War’ between Israel and Iran, as well as its effect on oil prices. Then, we examine the arguments from both bears and bulls regarding the future of the US equity market. We then move to a discussion of Putin’s aims in Ukraine, as well as the threat Russia presents to global security. To end this week, we investigate commodities, an asset class which may present interesting opportunities in the near future.

The Israeli-Iranian Conflict and its Global Implications

The recent bombing of an Iranian Embassy building in Damascus by Israel marks a significant escalation in what has long been a simmering undeclared war between the two nations. While Iran has vowed to retaliate, both sides are exercising caution to prevent a full-scale war. However, Israel’s strategic objectives have included weakening Iran’s regional allies, such as militant groups in Lebanon, Syria, Iraq, and others. This aim has had tragic consequences when civilians are mistakenly killed when these militant groups are the target. The resulting retaliatory rocket launches into northern Israel by Hezbollah have forced over twenty-five thousand people to flee their homes along Lebanon’s border region. 

Iran’s pledged retaliation raises substantial global security concerns, especially regarding its nuclear program. The Institute for Science and International Security has assessed an “Extreme Danger,” with a total threat score of 151 out of 180. These tensions are exacerbated by regional events that have emboldened Iran, leading to increased concerns about nuclear weaponization and the urgent need for diplomatic efforts to prevent a dangerous escalation. Additionally, these developments have raised concerns about potential disruptions in oil supply, driving prices to their highest levels since October. Brent futures, which had been trading between $75 and $85 per barrel since the start of the year, have increased in the short term due to this heightened geopolitical risk and robust economic data, but have not seen explosive growth that is usually seen during chaotic periods in the Middle East.

US Markets: Bearish or Bullish?

JPMorgan Says Stocks Are So Crowded They May Crack at Any Time

Alexandra Semenova, Bloomberg

Goldman Sees Pension Funds Offloading $32 Billion of Stock Soon 

Jan-Patrick Barnert & Michael Msika, Bloomberg

Should investors keep riding the US markets runaway train?

Katie Martin, Financial Times

A Million Simulations, One Verdict for US Economy: Debt Danger Ahead

Bhargavi Sakthivel, Maeva Cousin, & David Wilcox, Bloomberg

The US stock market has been on a tear in 2024, fueled by a combination of strong corporate earnings reports, artificial intelligence (AI) hype, a healthy US economy, and the Fed signaling future rate cuts this year. However, analysts are torn on how long the market can continue its upward momentum. Experts from top Wall Street banks present both a bullish and bearish case. For the bulls, the US stock market’s strong performance seems unstoppable, with Goldman Sachs presenting a potential scenario where the S&P 500 reaches as high as 6,000. Goldman Sachs also expects pension funds to sell a large amount in equities, around $32 billion, to rebalance their investments after a strong quarter. This would be the biggest adjustment in almost a year and could put pressure on stock prices. The reason for the selling is that pension funds have targets for how much they can invest in stocks and bonds, and after a strong stock market run, they need to sell some stocks to bring their investments back in line with their target market exposure.

The bears, such as JPMorgan’s chief global equity strategist, have warned that an excessive overcrowding among the top stocks may raise the possibility of a “flash crash”, where the markets quickly correct. Some even warn of a bubble-like environment among tech stocks, where unexpected negative news could trigger a downturn. Some analysts give a bleak picture of the macroeconomic outlook, with the Congressional Budget Office predicting a debt-to-GDP ratio of 116% by 2034 (a figure which could be pushed higher by further tax cuts, rising interest rates, and government spending). A crisis like a credit rating downgrade would severely curtail confidence in US debt, which would have catastrophic consequences reaching beyond financial markets. Either way, bearish or bullish, investors may want to focus on companies performance in the upcoming earnings season, inflation and interest rates, as well as key political developments pertaining to US fiscal responsibilities.

Putin’s Ambitions and European Security 

Putin Offers Both Reassurance and Threat on a Wider War

Ivan Nechepurenko, The New York Times 

Russia’s Military Is Already Preparing for Its Next War 

Amy Mackinnon, Foreign Policy

Putin is waiting for Washington to go silent

Gideon Rachman, Financial Times

Putin has clear aspirations to witness the decline of what he perceives as the “American empire.” His views on the eventual fall of world-spanning empires were deeply influenced by his formative experience during the fall of the Berlin Wall and the collapse of the USSR. However, potential political turmoil in the United States, such as the aftermath of a Trump re-election or a contested Biden victory, could create opportunities for Moscow and Beijing. Despite Putin’s ambitions, the current European landscape differs from 1989. The US alliance system in Europe is based on consent, and European nations, while reliant on US military power, are determined to resist Russian domination. Even if Washington faces internal challenges, European nations are unlikely to passively accept Russian influence, making Putin’s ambitions more challenging to achieve.

Nonetheless, concerns about the future of global security persist. In a recent speech to Russian Air Force pilots, President Putin issued a warning, stating that F-16 fighter jets supplied to Ukraine by Western allies would be considered “legitimate targets” for attack if operated from airfields in other countries. Putin also rejected claims of Russia planning to invade NATO countries as “complete nonsense,” countering arguments used by the Ukrainian government and its supporters to persuade the U.S. to send more military aid. Additionally, Russian officials, including Putin, have depicted Ukraine as the likely mastermind behind the recent terrorist attack in Moscow, despite evidence pointing to radical Islamists. Furthermore, Estonia’s foreign and military intelligence chiefs have revealed that the Kremlin is aggressively restructuring and expanding Russia’s military, citing the need to prepare for a potential conflict with NATO in the next decade. As part of these reforms, Russia plans to overhaul its armed forces, increasing personnel by 30 percent to 1.5 million by 2026, with a specific focus on the Western strategic direction and Ukraine. These recent developments and President Putin’s rhetoric have failed to alleviate concerns about global security.

Discussing Commodities

Three reasons why oil prices are remarkably stable

The Economist

The Bullish Case for Commodities

John Stepek, Bloomberg

Gold Pares Gains From Record as US Factory Data Spurs Fed Debate

Jake Lloyd-Smith & Yvonne Yue Li, Bloomberg

The unique geoeconomic circumstances that we find ourselves in warrant discussion of an interesting asset class: commodities. Despite geopolitical turmoil in the Middle East, oil prices have remained uncharacteristically calm. Analysts offer three reasons as to why the market has kept its cool: unconcentrated supply, spare production capacity, and weak demand. On the supply side, a larger amount of oil is produced outside of the Middle East nowadays, with only 29% of the world’s supply being sourced from the region (down from 37% in the 70s). Analysts predict that new sources (such as Guyana) and increased stock from the US and Canada will be enough to cover global growth in 2024. Additionally, oil from Russia continues to flow despite Western sanctions, alleviating the pressure on prices further. The second reason why the markets have stayed calm is that OPEC members have plenty of room to increase supply at short notice. The third reason is weak demand. China’s economic slowdown weakens global demand for the short-to-medium term, while the growth in renewables and alternate energy sources will likely slow the demand for oil over the long term.

Other commodities deserve attention as well. Many analysts advise that commodities can be a good investment during periods of high inflation, as equities, bonds, and even property sometimes fails to keep up with rising prices. Commodities, on the other hand, can benefit during these conditions as they are real assets, and analysts at Bank of America predict that these assets may experience a bull market in the near future, one in which investors may gain if they invest in commodity producers such as mining firms (some of which are currently trading at discounts). Gold, in particular, has seen significant movement in recent days. Price recently reached an all-time high over $2,200, but its gains slowed due to traders reassessing the likelihood of the Fed cutting rates. As lower rates are usually positive for gold (as it doesn’t pay interest), the potential rate cuts (of which the Fed signaled there may be two this year), gold has gained 13% since February 13th, 2024’s low. Additional factors attributed to the rise is China’s central bank buying bullion, as well as elevated geopolitical tensions in Europe and the Middle East. Analysts at JPMorgan said that gold was its top pick in commodities, while Goldman Sachs said it sees potential for gold to hit $2,300 in the near future.