MARKET IS IGNORING GEOPOLITICAL RISKS
2016-10-14 7pm EDT | #Russia #Putin #Yemen #stocks #bonds #Pound #GBP #EURGBP
One of my good buddies emailed me this morning to ask my thoughts regarding the rumours Putin had ordered all Russian officials and their families throughout the world home. I quickly responded that I hadn’t heard them and asked he send me a link. He responded with a link to the following Daily Mail story:
The source of their information was Znak.com. I have no way of discounting the credibility of their information, but here is the mangled Google translate original text:
Russian officials, up to the highest level, it is recommended to return to the country of children studying abroad. And to do so without waiting for the end of the study, and by shifting offspring in Russian universities. At home, parents should also return to officials and deputies, if the older generation of the family for some reason resides abroad without losing the citizenship of the Russian Federation, told Znak.com just five companions whom informal request from the presidential administration are most directly affected.
The recommendation will apply to all: from the staff of the administration as well as regional administrations, to deputies of all levels. Do not escape the new duties even employees of public corporations. Those who wait to the implementation of tacit request, reminded of the already known when the next of kin of the stay of the younger or the older generation abroad became a complicating factor in subsequent career in the public sector, said one of the interlocutors. According to him, in recent months it has become aware of several such cases.
Although I am somewhat dubious of simply blindly accepting this reporting, there can be no denying geopolitical tensions are escalating rapidly, yet the market seems impervious.
The recent confrontation in Yemen between the Houthi rebels and the USS Mason is a perfect example. From CNN:
(CNN)An American destroyer struck three sites in Yemen on Thursday, hours after missiles targeted a US warship in the Red Sea for the second time in four days, defense officials said.
The USS Mason was targeted late Wednesday by missiles from territory controlled by the Houthis – a minority Shia group that has taken control of swathes of Yemen, including the capital, Sanaa.
The strikes marks the first instance of the US firing at Houthi targets since the Yemen civil war erupted March last year.
The same warship was targeted Sunday, when two missiles were launched within 60 minutes of each other, but in both incidents they missed the ship and landed in the water. The guided-missile destroyer was not damaged in either incident, officials said.
This is a big deal, yet when I go to the CNN front page, I can’t find any mention of it.
The United States seems more interested in what Trump thinks about Lindsay Lohan than the fact one of their warships is having missiles fired at it. And before you dismiss this as some ragtag bunch of rebels simply lobbing some missiles with no real chance of hitting the US ship, read Rick Francona’s Middle East Perspectives blog:
OCTOBER 10, 2017
Houthi attack on USS Mason - an Iranian challenge?
The headline from the Red Sea is pretty straight forward - two missiles were fired at a U.S. Navy destroyer while the warship was sailing in international waters off the coast off Yemen. The missiles were fired from a coastal area of the country under the control of the Houthis, a Shi’a rebel group sponsored by Iran.
Fortunately, the missiles did not hit their intended target. According to the Navy, the ship did not sustain any damage nor were any of the crew injured, although the missile impacted close enough to the vessel to trigger on board countermeasures.
The vessel targeted in the attack was the Arleigh Burke-class guided-missile destroyer USS Mason (DDG-87), traveling in company with another Arleigh Burke-class destroyer, the USS Nitze (DDG-94), and Afloat Forward Staging Base (AFSB) USS Ponce (AFSB(I)-15).
The three ships were ordered to the Red Sea near the strategic Bab al-Mandab strait in the wake of a Houthi missile attack on the United Arab Emirates logistic vessel HSV Swift on October 1 in this same area.
The Swift was not so lucky - it was struck by a missile and caught fire. The vessel was formerly under charter to the U.S. Navy, but was sold to the UAE National Marine Dredging Company and was operating under charter to transport humanitarian aid to Yemen and evacuate wounded civilians from the country.
The missiles used in both attacks are believed to be either a Chinese-built C-802 anti-ship missiles (NATO: CSS-N-8 Saccade) or an Iranian reverse-engineered copy called the Noor. While not technologically advanced, the missiles’ simple design is easy to maintain, easy to operate, and can be very effective.
As I said, what happened is fairly straight forward, but why would the Houthis open fire on a U.S. Navy warship?
This is an obvious challenge to any member of the Saudi-led coalition currently conducting airstrikes on Houthi targets in Yemen. The Houthis have warned these nations to avoid Yemeni waters. The United States is a member of the coalition, providing intelligence, logistics and aerial refueling.
The Houthis may not have been aware of the nationality of the warship, although it would be patently irresponsible to launch a missile at a ship ostensibly in international waters without positive identification.
It may go further - this may be an indirect challenge to the U.S. Navy by the Iranians, the primary supporters of the Houthis. The Iranian advisers working with the Houthis are members of the Islamic Revolutionary Guards Corps (IRGC), which views the American Fifth Fleet as its primary adversary in the region.
Over the past few months, there have been numerous provocations in the Persian Gulf by IRGC crews in armed fast boats harassing U.S. Navy warships. Coincidentally, at least one of these incidents involved the USS Nitze and the USS Mason.
The attack also occurred the day after Saudi aircraft bombed a funeral in Sana, killing more than 100. The Houthis may have been seeking retaliation for what they believe was a deliberate attack. The IRGC issued a statement that the rebel group would avenge the bombing, calling it “a U.S., Saudi, Israeli joint conspiracy.”
The question now - how does the United States react to what many believe constitutes an act of war?
The Administration must react decisively. Not doing so will only embolden the Houthis to continue to fire on American warships in the Red Sea, and embolden the Iranians to continue their escalating provocations in the Persian Gulf.
The Iranians have already assessed this Administration as unwilling to challenge Tehran. Failing to act will only validate that assessment.
The reaction needs to be stronger than a diplomatic protest from Secretary of State John Kerry - he is already regarded as weak by the Iranians.
This reaction needs to come via the Department of Defense
I am not sure how all these moving parts relate to one and another, but as the United States is embroiled in an ugly Presidential election (one that rivals even when President Camacho won in a bitter close battle), her adversaries are definitely testing her resolve.
I am not predicting these hostilities will escalate, but I am making some minor adjustments to my portfolio in case these events are preludes to more sinister confrontations. Remember, the time to buy insurance is when no one wants it.
And the only thing I am sure about is that the market is completely ignoring these developments. Whether the market is simply smarter than me and understands these events are nothing to worry about, or whether it is a “it doesn’t matter until matters” situation, I will leave for you to decide.
I might be talking my book, but I am surprised at how little the pound has declined against the Euro over the past couple of days. There have been a couple of negative developments, yet EURGBP is barely rising.
First there was news Scotland would have another referendum to decide if they want to remain in the United Kingdom.
I was expecting EURGBP to spike on that news, but it barely budged. Then this morning British PM May announced her appointments for the negotiating team for BREXIT, and it was stuffed full of hard line BREXITERs. Again I would have expected EURGBP to be bid, but we are actually down on the day.
When a market no longer responds to bad news, it is time to think about going the other way. I have been dead wrong with my GBP call, but I wonder if the bad news might be all baked in?
Thanks for reading and have a great weekend,