The continuing recovery in cyclically sensitive markets points to improving growth sentiment. This week, even the IMF upwardly revised its 2023 global economic growth forecast, raising it to 2.9% from 2.7% in October. Optimism is such that the IMF even greatly upgraded the outlook for Russia from -2.3% to +0.3%!
The problem with the increasingly positive tone in the market in the new year is that geopolitical risks are going up. If there is anything that we learned from the past few years is that when economic growth and geopolitical risks collide, the latter often wins out.
Regarding the Ukraine war, the latest news is that the United States is about to sign off on a new delivery of advanced weapons to Kiev, this time including the Ground Launched Small Diameter Bomb (GLSDB), a long-range rocket system that has a range of 94 miles (150 km). This brings the US one step away from approving the 297-km range ATACMS missile that we have already warned could trigger a direct confrontation between Russia and NATO.
Notwithstanding the pro-Ukraine propaganda in the western media, mounting evidence continues to support our view that the momentum on the battlefield is turning against Ukraine. The RIWI-Unbound Military Conflict survey, conducted daily shows that the number of Ukrainian respondents expecting the military conflict to intensify over the next few weeks is at the highest level since the start of the war (see chart below).
Ukraine v. Russia: Military Tension Score
Note. Military Conflict Risk Index (Compass by RIWI x David Woo), Ukraine v. Russia, starting Feb. 15, 2022 and ongoing. 7-day moving average displayed. Respondents were asked Over the next few weeks, do you think that military tensions between Ukraine and Russia will be: with a 5-point response scale ranging from less intense (-2x), a little less intense (-1x), to the same (0x), to a little more intense (1x), to more intense (2x).
Tension is escalating in the Middle East, too. Over the weekend, attacks by drones were carried out against multiple strategic targets in Iran. The attacks were so widely reported by eye-witnesses that even Tehran had to admit that one attack against a military complex in Isfahan did take place. The Wall Street Journal reported that it was Israel that was responsible for the attack. However, in our view, it is just as likely that the US could behind the attack. The Biden administration appears to have given up its long-stated goal of resuscitating the JCPOA and has an incentive to disrupt the production of Iranian missiles heading to Russia to be used against Ukraine.
Whether it was Israel or not, the RIWI-Unbound military conflict survey shows that the perception of military tension between Israel and Iran among our respondents in Israel and Iran jumped over the past 3 days (See chart below), especially among Iranians. While we are not saying that retaliation by Iran is a certainty, Tehran will be under pressure to show that these audacious attacks will not go unpunished. If Tehran suspects that Washington is involved in any way, attacks on Saudi oil lines like in 2019 could be a logical response.
Israel v. Iran: Military Tension Score
Note. Military Conflict Risk Index (Compass by RIWI x David Woo), Israel v. Iran, starting Mar. 5, 2022 and ongoing. 7-day moving average displayed. Respondents were asked Over the next few weeks, do you think that military tensions between Israel and Iran will be: with a 5-point response scale ranging from less intense (-2x), a little less intense (-1x), to the same (0x), to a little more intense (1x), to more intense (2x).
Intensification of the Ukraine war and the possibility of Iranian retaliation are supporting our conviction in our bullish oil and bearish equity trade. Likewise, we think the crowded long/overweight positions in European assets and the euro are vulnerable to a sudden rude awakening that geopolitical risks will be higher in 2023 versus 2022. (David Woo)
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