Marc Chandler (we are fans) in a longer format than we usually see him.
From Neue Zürcher Zeitung's TheMarket.ch, October 16:
Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex, talks about the consequences of the war in Israel for the financial markets. He sees the recent rise in oil prices as an additional burden on the economy and expects the dollar to depreciate.
The war in Israel shocks the world. Israeli ground troops are reportedly preparing to invade the Gaza Strip. The danger of an escalation of the conflict in the Middle East is increasing. Energy markets are reacting accordingly. The price of oil has taken another leap upward in recent days.
«In some way, this brings back memories of the eve of the global financial crisis in 2008», says Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex. «At that time, oil prices were rallying too and ECB president Trichet hiked interest rates just before Europe went into a deep recession», he adds.In this in-depth interview, which has been edited for length and clarity, the foreign exchange specialist with more than thirty years of experience comments on the market impact of the war in the Middle East, the dollar’s controversial role as the world’s reserve currency, and the consequences of a recession in the US for investors.
Mr. Chandler, what does the war in Israel mean for global financial markets?
I recognize the brutality of this war and the human tragedy, but there is also a broader geopolitical backdrop. This is a highly complex situation, given the different global forces that could be shaping what’s happening in the Middle East. For instance, some observers argue that the attack on Israel may be part of a larger pattern of flaring up of tensions in several places, including Nagorno-Karabakh in the South Caucasus, and Kosovo and Serbia.
What could be the reason for all of this?
Think about it: If you’re Russia and you thought there had been too strong of a pushback against your invasion of Ukraine, you would either want to see or purposely foster other distractions. That’s why some people are suggesting that Russia is fanning the flames to sap the strength of the alliance it faces in Ukraine. Alternatively, there’s also the general idea, advocated by people like Ian Bremmer, of a hegemonic stability crisis. The basic point of this view is that America is distracted and can no longer fulfill its role as a hegemon. As a consequence, you get a lot of forest fires.
The markets are focusing, among other things, on how the war in the Middle East could affect the price of oil and thus the economic outlook. What do you think?
I was struck by the fact how much oil prices rallied since the end of June. WTI almost went to $95 a barrel, then backed off sharply, whereupon there has been a knee-jerk price jump in the wake of the Hamas attack on Israel. In some way, this brings back memories of the eve of the global financial crisis in July 2008. At that time, oil prices were rallying too and ECB president Trichet hiked interest rates just before Europe went into a deep recession. The takeaway is that higher oil prices do lift inflation and they do lift nominal measures like retail sales, but ultimately, they are a tax on consumers.
Today, too, the central banks are taking a hard line in order to bring inflation under control. How great is the threat of a recession?
A lot of armchair economists, which is basically everybody I know, interpret the higher oil prices as inflationary. But the more people pay to fill their car with gas, to heat or cool their house, the less money they have for other things. So the price of oil raises the cost of energy and this means everyday people have less money to spend, reducing demand. Typically, most of the modern recessions in the US started after a sharp rise in energy prices, often after a doubling in the price of oil. So this is one more headwind facing the economy. We see the tightening of credit conditions, growing labor disputes like the UAW strike, and I still think the US government may close down in the middle of next month. Higher energy prices push in the same direction, weakening the economy.
So what does the war in Israel mean for global energy markets?
In the past few years, the narrative has spread that OPEC was dead. To me, it seems quite the opposite is the case. The Saudis especially have reemerged as a swing producer, but they also face existential challenges. Many US states and European countries want to outlaw combustion engines by 2035. Japan is considering it too. It’s truly remarkable: The so-called sin stocks used to be gambling, alcohol, weaponry and things like that. But now, somehow, it’s oil companies. So if I was Saudi Arabia, and I knew that my country’s wealth is still buried in the sand, it would scare me that the advanced countries are talking about reducing the demand for oil. That’s why Saudi Arabia is trying to diversify into petrochemicals and refining, but ultimately, they’re still tied to carbon.
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