Ingram's October 2023

IN A NUTSHELL

by Ken Herman

Escalating Tensions—Globally and on Wall Street

As stocks stumble, bond markets inflict their own measure of punishment, leaving investors with few places to turn.

While oil fundamentals have not yet changed since these attacks, it does not mean they won’t. If Iranian involvement in the attack is affirmed, the U.S. could step up sanctions on Iran’s crude exports. If Israel were to strike any Iranian infrastructure, crude oil prices would spike immed iately. The Biden administration had hoped to broker a Saudi-Israel deal in the next six months, but the escalating situation in Israel has likely dashed hopes for normalized relations bet ween the countries. Saudi Arabia is not expected to slow

After the deadly attacks over the Yom Kippur holiday, Israel’s goal regarding Hamas has shifted from containment to eradication. Gaza is now sealed off. Hamas and the Israeli Defense Forces are exchanging rocket fire. But Israel is also mobilizing troops in preparation for a large-scale ground assault. The two greatest risks for regional escalation now are with Egypt, which shares a border with Gaza, and with Hezbollah, to Israel’s north. The Egyptian border is sealed, but Gaza civilians are eager to cross it to escape the esca lating conflict, suggesting it could be sucked into the hum anitarian response. Meanwhile, on the Lebanese border, Israel has excha nged rocket fire with Hezbollah, which, like Hamas, acts like an Iranian-funded terrorist organization. Hezbollah

is well-funded and well-armed and is the most likely to be pulled into the conflict if anyone is, according to reports from The Wall Street Journal . The massive surprise attack on Israel by Hamas adds to an already fluid set of potentially destabilizing scenarios around the globe that only make investing in U.S.- based assets that much more attractive. This was an unprecedented attack that will result in a major military escalation with regional implications, beginning with how nations will view the long reach of Iran as a sponsor of terror in that part of the world. One thing is certain: the long-running Arab/Israeli conflict just got hotter. Gita Gopinathm, first deputy managing

oil production, al though there is a risk of the Saudis’ unwinding their additional volun tary supply. The recent surprise attack also leaves Israel unlikely to make any conces sions to the Pale stinians that the Saudi government might have sought. In general, bond markets tend to punish countries

Large budget deficits and weak leadership will awaken the bond-market bear. In a time of rising conflict, both conditions are sending chickens home to roost for U.S. investors.

director for the International Monetary Fund, told Bloom berg News that oil prices were the most likely way the broader world would feel any economic impact from the conflict. It is still very early, she said, but if oil prices rise $10, it is likely to increase global inflation by 0.4 percent age points. Crude oil and gold futures quickly bumped higher in response to the unprovoked Hamas attack on Israel. Wall Street analysts generally expected a “knee-jerk surge” in crude prices but limited gains thereafter. That is, provided the conflict does not expand into a regional war—which is far from certain since the fighting is on the doorstep of an important oil-producing and exporting region.

with large budget deficits and weak leadership. Alas, that is where we also stand now in the U.S. (as profiled in a recent Wall Street Journal article entitled, “Rising Interest Rates Mean Deficits Finally Matter.”) The article makes the point that it is very odd for Treasury bond yields to rise when inflation is cooling, and the U.S. economy is growing. The likely culprit? Rising deficits that must be financed by our government.

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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October 2023

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