The situation in the Middle East destabilized on October 7. The escalation will carry the most severe consequences for political arrangements and the economic field.
Let's take a close look at the timing of the conflict.
The worst time for the current US government
The attack came at almost the worst possible moment for the Democratic Party of the United States.
The US is about to start the next presidential cycle. The country has always acted as a security guarantor in the Middle East. Thus, current events expose the fragility of the construct as it is.
Secondly, an unprecedented event has occurred in the United States - Speaker of the House of Representatives Kevin McCarthy was removed. This event significantly increased the chance of another government shutdown in November.
Thirdly, the United States strategic oil reserves are at a minimum. SPRs are at 351.3M – the lowest levels since the 1980s. This is making it increasingly difficult for the United States to wage a full-fledged war in the energy market.
All this means that a brutal confrontation has begun within the United States. It may lead to even more significant destabilization, both internally and externally. In the extreme case, the government may face a civil or international war.
When turbulence increases, the main allied countries and creditors of the United States are the first at risk. Here, it is worth taking a look at Japan: as of July 2023, the island nation holds more than $1.1 trillion in American debt. Similarly, the UK owns a total American deficit of $662 billion.
The Japanese economy
Over the past three years, the Japanese yen has demonstrated the worst performance among developed currencies against the US dollar. JPY fell by over 40%, increasingly losing its status as a safe-haven asset.
The main reason for this devaluation was the increased key rate in the US when the BoJ abandoned monetary tightening (carry-trade). However, the Japanese economy remains hostage to its main creditor, and sooner or later it will be forced to start raising the key. With the current debt load of 264% of GDP, this move could send the economy into a deep knockout.
Nikkei225 has grown by more than 20% over the current year. We believe the following years may not be favorable for the Japanese stock market, and the bullish cycle may end.
Consequences for the British economy
Last year, the British pound reached an absolute historic low against the US dollar. GBPUSD tested 1.0357, thus breaking the 1.0520 level from January 1985.
The UK is a net importer relative to its key ally (imports from the US to Britain are almost two times higher than exports). Thus, the current weakening of the national currency will unlikely benefit the British trade balance. A recession in the American economy and geopolitical turmoil could have an even more negative impact on the country's trade balance. At the same time, the UK's debt is 2.5 times less than Japan's, which makes the situation a little less risky.
The British FTSE-100, which reflects the capitalization of the 100 largest companies, remained virtually unchanged in 2023, staying in the price range of 6900 – 7700 points. The chances of a decline are currently higher than the chances of the bullish trend continuing.
Commodity prices
The impact of the Palestinian-Israeli conflict on oil prices was entirely predictable. After an unexpected and profound correction in the energy market, the price of Brent oil moved upward, testing the level of $90.40.
Oil prices will be one of the key topics in the coming year. The problem is that pumping developed economies with liquidity to overcome the pandemic could only continue calmly if low prices were guaranteed on the energy market. Currently, with Saudi Arabia and Russia putting pressure on the price on one side, and various black swans in the form of geopolitical upheavals and internal political struggles in America shaking the world, no such guarantees can be considered reliable.
As a consequence, the economy cannot be brought to a soft landing after which a new cycle of monetary easing could be launched. In simple words, high rates will have to be maintained in the US for a long time.
The question is how much safety margin the US financial sector will have. We all remember the bank collapse in the second quarter of this year. A fairly large volume of UST remains on American banks' balance sheets. The profitability of treasuries is prohibitive. The rate is 4.7% for ten and 30 years, at 4.8% - the highest over the last five years. The risks of an explosion are significant, especially since part of the American establishment would benefit from this explosion.
We expect the oil price to continue moving toward $100. The actions of the OPEC+ countries and instability in the geopolitical contours will facilitate this. Demand remains the key risk factor for the oil market, and could decline sharply when developed economies enter a peak. But it’s too early to say much about this.
The price of gold also predictably rose amid the HAMAS attacks on Israel. The spot price reached $1990 per ounce. Overall, we are moderately optimistic about the price of gold. Global economic and geopolitical events are more likely to favor price growth. The question is the horizon for the resumption of a full-fledged bullish trend.
Gold price technical analysis
From a technical point of view, we see that XAUUSD broke the 200MA and the price fluctuates near the resistance line at $1990. In the short-term daily time frame, almost all technical indicators are in overbought zones, meaning that the price is too high. However, the market prefers listening to geopolitical news rather than paying attention to technical analysis.
After breaking the resistance of $1990 the next target for the price may become $2050.
Summary
The timing of the start of the Palestinian-Israeli conflict was hardly chosen by chance. Destructive processes in the United States are gaining momentum, and the stakes are rising.
Destabilization will likely continue to intensify, which may push the price of oil and support the price of gold.
Countries that are the largest creditors to the United States are at risk. First among these is Japan and its stock market.
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