The US ceasefire with Iran collapsing after an Iranian missile barrage targeted a US base in Jordan and all incoming missiles were shot down, but President Trump promised to hit back hard.
And indeed overnight the Pentagon confirmed a new wave of retaliatory air strikes.
The war is now rapidly spreading with US and Saudi forces striking militia in Iraq, and we do continue to monitor what's happening in terms of negotiators from Pakistan.
Meanwhile, Egypt was attacked for the first time with an Iranian drone. oil tankers at a Mediterranean port.
Well here to break down the geopolitical playbook is Matt, who is chief geopolitical and US political strategist at BCA Research.
Matt, good morning.
Thank you so much for joining us.
So here we are, we are looking at elevated oil prices, although on the session WTM Brent are lower.
But given the fact that Iran is demanding control and fees over the Strait of Hormuz and escalating tensions, where do you stand right now when it comes to the conflict, the winning conflict in the Middle East?
Well, thank you Remi, for having me back.
You know, I think Iran's strategy needs to be understood.
They do not want to give the president the political benefits of a ceasefire or a de-escalation, and what they're ultimately aiming to do is to create an economic cost that saps the resolve of the American people to continue fighting the war, because that will have benefits going into next year and even in future administrations.
And so they are maybe willing to go back to the negotiating table and talk about ceasefires, etc. but they still want to claim that they can give permission to ships whether to go in and out of Hormuz, and they still want to be able to target military targets and impede shipping so that they're keeping the oil price high enough that Americans get tired of the war.
Yes, and when we're looking at the energy sector, of course depending on which economy we're talking about, whether it's the European economy or what's happening in Asia or the US, we know that there are different impacts in terms of energy prices.
But given the fact that we're seeing this widening conflict in the Middle East and of course we have to keep an eye on Ukraine as well as Russia, what impact will this have on global economies?
Well, generally we're still in a zone where, like, for example, if you look at the 2nd quarter US GDP reading, domestic demand is pretty resilient.
And China, for example, the Politburo just met and discussed, you know, often their July meeting is significant for macro policy, but they did not announce a massive increase in And government support for the economy.
So there's sort of a holding pattern from some of the biggest economies where they're growing decently enough.
They're not taking emergency actions.
They're not really required to.
And in that context, having agitation that impedes the Flow of oil and it continues to draw down inventories, especially for refined products, that's going to just add some price pressures.
And so we'll see that continuing and like I say, Iran's strategy is to probably keep the oil price around $90 per barrel or higher, and that's just going to be an agitation.
It really won't, it won't destroy the business cycle.
And Matt, of course I do want to get your perspective on reports that US air defense interceptors, as well as sophisticated weaponry, are rapidly being used up, but it is a midterm election year and there are a lot of opinions out there about this conflict in the Middle East.
So does the US actually have the military capacity for a major escalation, continued escalation for that matter, or do you think Trump's warnings are limited by supply chain realities at this point?
Yeah, I think over the next 12 months, the US has the capacity to seize Hormuz if it if it deems it necessary, but not to topple the regime because that would be a much larger and longer war.
Uh, but clearly it is the case that interceptors are being depleted and we already mentioned oil inventories.
So the ability of the Trump administration to do this is, is rapidly declining, and they'll have to make a decision in terms of what they want, you know, what does President Trump want his legacy to be?
Does he want to restore American dominance of maritime?
Choke points around the world and send that signal, or does he want to come up with a fudge and focus on ongoing nuclear negotiations and and and try to rebuild those inventories.
And and that's ultimately a decision I think that he'll have to make.
And I think what we'll see in the meantime is Iran providing just enough agitation to keep the commodity markets from normalizing completely.
And speaking of markets, I do want to get your perspective on what all of this means in terms of the geopolitical conflict on portfolios.
So how should managers out there be positioning for volatility and in addition to that, which sectors or asset classes offer the most resilient hedges as this conflict continues to drag on?
Yeah, well, first of all, I think we should understand that Hormuz will continue to be relevant.
So the market will need to respond in different segments when this happens, and the tendency will be for oil to, you know, have a higher floor, like I say, probably around $80 per barrel, averaging probably around $90 per barrel.
Um, and then that will also prevent, uh, gold, for example, from recovering immediately.
I mean, ultimately gold is pretty well supported structurally, but in the short run, as long as there's this oil problem, we might not see gold finding its footing.
We'll probably continue to see the equity market struggle through and continue to rally, given that it's driven primarily by artificial intelligence, and that's going to be reasserted.
I don't think that's quite over yet, but in terms of seeking shelter, one thing we can say is that the underlying US economy remains pretty robust and US equities are still dominant in global equities, and so you would want to remain cyclically constructive, at least for At least for now.
Well, Matt, we will have to leave it there, but always great getting your perspective.
Thank you so much for joining us with all of your insights today.
Thank you.
