Morning Briefing | Absorbing a Middle East Shock
Birkenstock goes public today – German sandal maker Birkenstock is set to begin trading under the symbol "BIRK" later this morning. The company priced its initial public offering ("IPO") at $46 per share yesterday. The move is aimed to raise as much as $1.48 billion, which would value the company at roughly $8.64 billion. This IPO will be one of the last major listings of the year in the U.S., and its performance could set the tone for the 2024 IPO market.
PepsiCo beat earnings and squashed Ozempic concerns – PepsiCo (PEP) exceeded its earnings expectations in its most recent quarter, and it also raised its growth forecast as consumers have coped with higher prices on its products. While volume fell, overall revenue rose due to these price hikes. Plus, the company has remained resilient against appetite-suppressing drugs like Ozempic. PepsiCo says it has not seen an impact on its sales so far but will be closely monitoring consumer trends. If anything changes, it's prepared to adapt its package sizes and focus on portion control. The company remained optimistic about its outlook and ability to deliver solid results.
Atlanta Fed president is against further rate hikes – Atlanta Federal Reserve President Raphael Bostic doubled down on his stance that further interest-rate hikes are not necessary. He emphasized that the current rate is sufficiently restrictive to bring inflation down to the central bank's 2% target. And while Bostic did acknowledge that an unexpected change in economic outlook could spark another increase, he thinks that's unlikely. Bostic is not alone in this opinion, either. There's a growing sentiment among top Fed officials that the recent surge in Treasury yields may reduce the need for further monetary-policy tightening.
Consumers anticipate a bumpy road ahead – According to a Federal Reserve Bank of New York survey, U.S. consumers expect slightly higher inflation and tighter credit conditions over the next few years. Overall, the survey revealed that sentiment is worsening among average Americans. They now expect inflation to be 3% in three years, which is up from the previous month's 2.8% and the highest reading in nearly a year. And for the one-year forecast, they're expecting inflation of 3.7% – the highest reading in three months. Additionally, the perceived likelihood for missing a minimum debt payment over the next three months rose to 12.5%, the highest reading since May 2020. The survey highlights consumers' ongoing concerns about financial stability and the damage caused by inflation.
ECB's de Galhau opposes increasing reserve requirements – European Central Bank ("ECB") Governing Council member Francois Villeroy de Galhau recently stated that there is no monetary justification for increasing reserve requirements for banks. His comments come after some officials had suggested increasing the requirement, including Austria's Robert Holzmann who suggested an increase as high as 10%. The current system requires banks to deposit only 1% of select liabilities at the ECB. Though there are proponents on both sides of the debate, others, such as Dutch central bank chief Klaas Knot, believe further analysis is needed before any decisions are made.
China considers a $137 billion stimulus – China is reportedly considering issuing at least 1 trillion yuan, or $137 billion, of additional sovereign debt. These funds would be spent on infrastructure projects and could potentially raise the year's budget deficit well above its 3% cap. China's move to stimulate its economy is seen as an effort to meet its official gross domestic product ("GDP") growth target of 5% for the year. While the impact to GDP is estimated to be a mere 0.7%, this stimulus would be seen as a positive message given the country's tight fiscal conditions and worsening real estate sector.
In today's NewsWire issue, Kevin is sharing an essay from colleague Corey McLaughlin, editor of the Stansberry Digest. In it, Corey covers the still-unfolding events in Israel so that we can consider what it might mean for the world, the markets, and your investments...
The world is watching war in the Middle East – again...
To recap the Hamas terrorist group's attack on Israel that began Saturday morning, here's the summary from CBS News...
They stormed into Israel by land, sea and even on paragliders as waves of rockets – more than 3,000 of them – were unleashed on Israeli towns and cities.
The gunmen from the group, which has long been designated a terrorist organization by the U.S. and Israel, went on a rampage, slaughtering civilians in the streets, engaging Israeli security forces with deadly effect, and kidnapping hostages including women, children and the elderly.
Some of them were paraded through the streets of Gaza – human trophies that Hamas knows it can use as leverage against its enemy.
I (Corey McLaughlin) don't expect you to get your mainstream news from the Digest. But today, I'm going to recap the still-unfolding events in Israel so that we can consider what it might mean for the world, the markets, and your investments.
Now, we know peace in the Middle East has long been elusive and debated. Rockets flying in the sky have become routine in the region's cycle of violence.
But in case you've grown immune to hearing about violence in the region, understand that what happened over the weekend was unprecedented. Here's more from CBS as of our press time...
An Israeli embassy spokesperson said Monday the death toll has risen to at least 900 Israelis, most of them civilians. Another 2,150 were reported wounded. More than 250 of the dead were Israelis who came under attack at the Supernova music festival near the border with Gaza when militants opened fire on the crowd.
Israeli officials also say Hamas fighters captured more than 100 hostages, including women, children and elderly people, who were apparently taken into Gaza as captives.
Some observers have likened the events to an equivalent of 9/11 in Israel.
Hamas militants launched bombs and missiles from Gaza, a tiny strip along the Mediterranean Sea, and the group's fighters crossed deep into Israeli territory... bringing captives back with them in an attack that appears to have taken Israel's leadership off guard.
The response has already begun... The Israeli government has reportedly drafted 300,000 reservists into the military and began bombing suspected Hamas locations in Gaza within hours of the Saturday morning attack, destroying buildings. Hundreds of Palestinians are also dead and thousands are wounded.
Suddenly an unknown number of Israeli hostages (estimated to be at least 150 as of this writing) are caught in the crossfire, with their fates in question. So is the state of the entire conflict – and region.
The suspected catalyst...
We're going to get into some political science for a moment... Here's what I can tell you about recent history – and I'm bringing all this up because it leads to an effect on oil supply and inflation (potentially in a big way).
Geopolitical and regional experts point to recent developments in Middle East political relations as being a possible trigger for the attack. Other factors include recent political infighting in Israel that left the country vulnerable, along with Israel's focus lately on the West Bank – the Palestinian territory that borders the other side of the country – rather than the Gaza Strip.
Hamas took over the Gaza Strip in 2007, which divided the Palestinian territories politically. Palestinian leaders in the West Bank have been more recognized internationally while, as we said, Hamas is considered a terrorist group by the U.S. and Israel.
Among other conflicts, in 2014 Israel arrested hundreds of Palestinians – some of whom may become part of prisoner swaps for Hamas' new Israeli hostages.
Within this context, columnist Thomas Friedman wrote a multilayered piece in the New York Times over the weekend, citing the possible trigger – a cozier relationship that had been brewing between Saudi Arabia and Israel with respect to the West Bank.
Here's what that means... Saudi Arabia was apparently on the verge of "normalizing" relations with Israel, meaning recognizing it diplomatically. That's in contrast with, say, rival Iran. In exchange, the Saudis were seeking U.S. help to develop a "civilian nuclear program" in Saudi Arabia, while also providing "security guarantees" and encouraging Palestinian development of the West Bank.
Friedman wrote...
Such a deal, as it was being drawn up, would... benefit the more moderate West Bank Palestinian Authority – by delivering it a huge infusion of cash from Saudi Arabia, as well as curbs on Israeli settlements in the West Bank and other advances to preserve a two-state solution. As a result, West Bank leaders might have earned a desperately needed boost of legitimacy from the Palestinian masses, threatening the legitimacy of Hamas.
Hamas may have taken these developments as a threat. A Saudi-Israeli deal could be a step toward a peaceful "two-state solution" in the region and other victories for the more moderate Palestinian leadership in the West Bank. That would undermine support for the Hamas group in Gaza, southeast of Israel.
Friedman also suggested Iran might have had an influence. Friedman offered...
Why did Hamas launch this war now, without any immediate provocation? One has to wonder if it was not on behalf of the Palestinian people but rather at the behest of Iran, an important supplier of money and arms to Hamas, to help prevent the budding normalization of relations between Saudi Arabia, Iran's rival, and Israel.
There's a lot to digest in this summary and hypothesis. And if you are to believe U.S. Secretary of State Antony Blinken, Hamas' precise motivation remains unclear... But just know there are many strands to this story, many of which connect seemingly disparate nations and interests in the Middle East and beyond.
Those interests are also, in one way or another, connected to one common commodity that has a large influence in the economy and markets...
The greatest direct impact on the markets was on oil prices...
When we look at the performance in the markets as investors digested the developments from the weekend, one thing stands out... a shock for oil prices.
Brent crude – the international benchmark – traded more than 4% higher to around $87 per barrel on Monday. West Texas Intermediate ("WTI") – the U.S. standard – saw a similar move.
By association, energy stocks finished up more than 3% Monday, the highest of the 11 major S&P 500 sectors. Notably, the "chaos hedge" of gold was also up 1%... Yet in the afternoon, the major U.S. indexes turned small losses into gains to also finish the day positive.
As Kevin Sanford noted on Monday, both Brent and WTI crude have seen notable surges over the past few months yet experienced significant losses last week. But that trend has paused...
Analysts express concern that weak global growth might adversely affect oil demand as we head into next year. However, heightened tensions and recent conflict in the Middle East have reignited apprehensions about oil being entangled in geopolitical crosshairs, possibly causing a short-term rise in oil prices.
The opposite effect – so far...
Interestingly, an escalating war in and around Israel and higher oil prices are reportedly the precise messes the White House was seeking to avoid by trying to broker a negotiation with Saudi Arabia. Here's NBC News on Monday...
Diplomats say that if Saudi Arabia agreed to recognize Israel it would lead other Arab states to do so. A series of such agreements would end decades of hostility between Israel and its neighbors dating back to 1948.
All three sides, though, have complex conditions for such an agreement. Breaking with past Saudi rulers, [Saudi Crown Prince Mohammed] bin Salman has signaled that he is willing to recognize Israel, given the vast economic benefits it would provide to Saudi Arabia. Before the Hamas attack, there were reports that Saudi Arabia had told the White House it would agree to increase its oil production to help cement a deal, something the Biden White House has sought for two years.
As we said when Russia invaded Ukraine, and now can sadly repeat 18 months later, war is ultimately an inflationary pressure – for myriad reasons depending on the context, including creating commodity-supply issues.
Russia and Ukraine, for instance, are tied to global supplies of food and oil. And in the Middle East, many battles have been fought over the decades... with oil concerns squarely in the middle of many disputes.
Predictably unpredictable effects – except one thing...
This appears to be another bloody, horrific conflict that is only in its early days. Developments in Israel's war against Hamas in Gaza will likely change the calculus of relationships not just between the enemies, but also among global powers like the U.S., Saudi Arabia, Iran, and others in ways that we can't predict.
Already, for example, Germany and Austria announced they are suspending aid worth tens of millions of euros to Palestinians – drawing battle lines in their association with the conflict. The U.S. has moved warships closer to Israel and is promising to help by providing resources to the Israeli Defense Force.
Here's more from Friedman...
This is not your usual Hamas-Israel dust-up. The Gaza-Israel border is only 37 miles long, but the shock waves this war will unleash will not only thrust Israel and the Palestinians of Gaza into turmoil but will also slam into Ukraine and Saudi Arabia and most likely Iran. Why? Any prolonged Israel-Hamas war could divert more U.S. military equipment needed by Kyiv to Tel Aviv, and it will make the proposed Saudi-Israeli normalization deal impossible – for now. And if it turns out that Iran encouraged the Hamas attack to scuttle that Israeli-Saudi deal, it could raise tensions between Israel and Iran and Tehran's Lebanese proxy, Hezbollah, and also between Saudi Arabia and Iran. This is an incredibly dangerous moment on multiple fronts.
According to a Washington Post article published on Sunday, citing a U.S. government official...
Washington's direct military assistance for Israel is expected to backfill the munitions that Israel will draw down as it fights Hamas, as well as provide an additional deterrent against Hezbollah, Iran and others who might be tempted to strike Israel.
Overall, when it comes to the markets, a prolonged war in the Middle East isn't likely to slow down inflation or government spending. You could think instead of this weekend's events as contributing to any investing thesis suggesting higher inflation and more debt for longer around the globe.
It could also devolve into an even greater conflict involving the direct and indirect interests of more and more of the globe's biggest and most powerful nations. That would mean more potential to have meaningful influence on policies that can stoke inflation – leading to strife, anxiety, and fear.
One could argue it's already happening.
All the best,
Corey McLaughlin
Remember, whether you're writing in about a past essay, asking us a question, or even responding to another reader's question... we want to hear from you! As always, send your questions and comments to new@stansberryresearch.com.
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