It’s Shoe Time!

By Michael Every of Rabobank

It’s Shoe Time!

It’s “shoe time”! The obvious pun on “show time” stems from the UN Security Council debate on the crisis in Ukraine held yesterday. We did not get to see a Russian leader banging his shoe on the desk, but we did get to see:

• The West accuse Russia of threatening Ukraine.
• Russia declare the US has allowed “pure Nazis” to take over Ukraine. This shows Russian historical fears: yet note President Zelensky is Jewish. On said fears, the ‘problematic’ areas of Ukraine for Russia are partly so because of them having been part of the Polish-Lithuanian Commonwealth until 1793, and the country’s border having been shifted westwards after WW2, along with Poland’s. Europe tries to forget this bloody history: the US doesn’t seem to know it.
• Russia warn “If our western partners push Kyiv to sabotage the Minsk agreements, something that Ukraine is…willingly doing, then that might end in the absolute worst way for Ukraine. And not because somebody has destroyed it, but because it would have destroyed itself and Russia has absolutely nothing to do with this.”; and
• The Russian UN delegate then walk out without even hearing what Ukraine had to say.

Against that backdrop it is perhaps no great loss that British PM BYO was unable to take a scheduled call with Russian President Putin because he was too tied up with the release of the Gray Report on No. 10 parties, which pointed out unacceptable leadership behavior, law-breaking, cover-ups, and excessive alcohol consumption. (Which there is no evidence of at all in the UK government, honest…doesn’t the clip remind you of a certain ‘Fast Show’ family with a drinking problem?). PM BYO is off to Ukraine today instead, where the allegations made in the Gray Report are called a normal working Tuesday. French President Macron did manage to hold another call with Putin yesterday: but he isn’t going to Ukraine, and neither are French weapons.

Clearly, geopolitical tensions, like blood alcohol levels, are rising, and the trees that have been climbed look harder and harder to climb down from: anyone hoping this can be achieved needs to first ask if those involved know how to climb much at all.

To underline this key point, Iran nuclear talks are “in the final stretch,” and “can’t go forever,” according to a senior US official, who adds “We will know sooner rather than later whether we are back in the JCPOA…or whether we’re going to have to face a different reality and reality of mounting tensions and crises.” We have heard that before endlessly as Iran has continued to work towards threshold nuclear status. Guess who the US is leaning on to help get a deal over the line? Russia and China. Against that backdrop, the White House has made another geopolitical decision that underlines the clear links between security and trade deals and the less clear links between the US and those who understand the Middle East, at least in the eyes of critics. Specifically, the US is to designate Qatar as a Major Non-NATO Ally (MNNA).

This previously mooted security move is tied to the sudden US scramble to try to find a massive new source of natural gas to pump to Europe should Russian energy supplies be cut off by either war, Russian action, or Western sanctions. Qatar is already home to the largest US naval base in the region. Moreover, one could see it as a statement of intent towards the US security umbrella in this unstable energy-rich focal point.

Except, as this story reiterates, Qatar is hardly pro-US in the broader sphere. It leans pro-Iranian; it has seen such a deep spat with the Saudis and UAE that they considered digging a moat around it; Qatar funds the anti-Western Muslim Brotherhood; it funds Hamas (and there are darker allegations regarding Syria); and it bailed out Turkey even when Ankara was acting in a manner some in the US regarded as detrimental to the long-run stability of NATO.

Moreover, other Middle East powers could be seen as better non-NATO ally candidates, especially if it is a case of ‘them or us’. Jordan, Kuwait, and Bahrain are already in, but Saudi Arabia isn’t – and it is not just building green white elephants while the US is only jawboning about doing so, but is allowing inbound tourism, and even hosting raves, to try and get the White House to notice there is more to it than just cutting up journalists in embassies. The very-Western UAE, which just hosted the Israeli president (another MNNA), is being hit by missile strikes from the Iran-backed Houthis the US removed from their designated terror list as soon as the Biden administration took office, and which they are now tut-tutting for their behavior.  

What is the US plan, presuming there is one? To not fill the Russian energy gap to the EU itself, but get Qatari LNG northwest by tanker? (Note Germany is now talking about building “one or more” new LNG terminals.) Assuming Qatar can fill that growing gap, as Europe’s own gas fields dwindle or are turned off, that involves the need for a calm Middle East? Ah, so logic therefore says the US needs a deal with Qatar’s close neighbor Iran! Except Middle East critics allege an Iran deal would see it try to expand its influence further (see the Houthis, for example); that Sunni powers might push back; and that Israel has made crystal clear it won’t be bound by it regardless. Plus, Iran is openly pro-Russia and China, not America, so why would they help the US out if it hurts Russia? And meanwhile, country after country along the maritime route from Qatar to Europe are shifting closer to Russia, or China, or Iran, or Turkey, not the US.

See what I mean about not being able to climb, or at least climb down? It’s enough to make you not just want to bang your shoe on the table, but to hurl it at someone in a D.C. think-tank. To put the boot in, you know who else was listed as a MNNA last year? Afghanistan.

I would imagine at this stage readers are either frustrated or exhausted, or both. Welcome to my world! The key implications for markets are this though:

• Geopolitics is getting messier by the day, with far larger volatility implied across markets.
• The US dollar is going to hold up well structurally regardless. Indeed, if you want to read a sensible think-tank report that underlines arguments made here for years, make it “Ukraine and Dollar Weaponization”. In short, even if the US drops a financial nuke on Russia it will push the greenback higher in the near term. Longer term is a different argument – but really means long.

Cyclically, the strong dollar argument is less clear. Indeed, at the sideshow of the Fed, Bostic was forced to walk back his 50bp March hike threat after the market threw shoes at him. As I was saying yesterday, it’s one thing to pretend you have a plan and talk tough. It’s another to actually know what’s going on and to have earned respect.

On which note, today is the RBA meeting, against the backdrop of a 0.8% m/m increase in house prices and a 4.4% jump in home loans vs. -0.4% consensus – although retail sales fell 4.4% as everyone saved for that mortgage. (Yes, the housing ‘wealth effect’ only works if you borrow against it, not if you have to defer all other spending to afford one.) The expectation is the RBA will drop QE –to what kind of chaos this time?– and the market also looking for signals over how long it will be until the inevitable first U-turn rate hike is made.