Ease In Our Time

By Micael Every, Global Strategist at Rabobank

Yesterday saw the BOJ hike rates to 1%, the highest level since 1995, and the RBA hold at 4.35%, with some chatter of the next move being down, not up, despite inflation running way above 2%. Today it’s the turn of new Fed Chair Warsh who, like the other central banks, has to deal with a geopolitical backdrop which may or may not allow for any monetary policy easing.

There, the text of the 14-point US-Iran MoU has been leaked ahead of its Swiss signing ceremony on Friday: ironically, it says “Ease in our time.” It allows Iran to immediately sell oil again, including the waiver of all banking and transport sanctions (though US legislation may prove an obstacle re: IRGC terror designation). It also includes the private sector $300bn investment fund for Iran, which Reuters claims has already been half committed.

What does this imply? It’s either a giant TACO that markets look past the full implications of to embrace; or a can-kick until the midterms (after which what?); or the Middle Eastern dish maqluba –not muqlaba (‘confrontation’)– layers of rice, veggies, and meat prepared one way up, then flipped when served. In other words, a behind-the-scenes-and-rhetoric normalisation from Iran. Ultimately, the proof of that dish is in the eating, and there are still many points to choke on.

NBC reports Iran has continued to fire multiple drones toward ships in Hormuz since the MoU was agreed, with the US shooting them down. The US Navy underlines the Strait still holds “substantial” risk. Insurers therefore remain wary, and as noted yesterday, maritime traffic is more likely to flood out than back in ahead.

Iran is demanding an Israeli withdrawal from Lebanon, which Israel states it will not and just struck Hezbollah again, with Iran now threatening to respond if Israel continues. Trump yesterday suggested Syria, with a history of looking at Lebanon as its own, should take care of Hezbollah (which the Lebanese government wants to disarm, but is unable to), not Israel. Given Syrian president Al-Sharaa’s Al Qaeda background and links to Turkey, with its history of looking at Syria as part of the Ottoman Empire, this does not seem the panacea some might hope for.

The MoU text is vague on uranium: it “will be adequately addressed in a final agreement.” Again, is it maqluba (a deal, flipping the rice) or muqlaba (no deal, flipping the peace)? China is warning the next phase of US-Iran talks will be “more difficult,” which is very clear.

The US is also weighing boosting ties with the Palestinian Authority as it seeks to advance its Gaza Board of Peace and an expanded Abraham Accords, while Israeli PM Netanyahu is said to be dropping election campaign posters showing him alongside Trump, as his opponents are all as hawkish as him re: Hezbollah and Iran, if not on the Palestinian issue.

In short, there are so many layers of rice, veggies, and meat here that’s not clear if anyone can flip the dish without spilling the food: and that’s just the Middle East, which is a current pivot point within a larger global negotiation.

At the G7, Trump promised to support Ukraine and sanction Russia – if Europe helps secure Hormuz. First, with minesweepers… but then with military patrols that offer GCC states a layer of protection (alongside Ukrainian anti-drone tech) should war with Iran restart after the US mid-term elections? Bloomberg reports Europeans are wary of committing naval power quickly. So are South Korea and Japan – but they likely all have a role to play.

Last week, Trump invoked the 1950 Defence Production Act regarding munitions, citing that “conditions exist which may pose a direct threat to the national defence or its preparedness programs,” due to “limited production capacity, fragile supply chains, long-lead dependencies, and related production bottlenecks.” What does he need this for if we are all friends now?

Elsewhere, the US is suggesting a ‘trusted partner’ AI scheme for its allies, extending what is currently US-only technology, a significant carrot. The European Parliament cleared the way for the EU-US trade deal – and Brussels is gearing up for a trade war with Beijing. Indeed, even as European discourse focuses on the US, it’s not hard to see the contrasting contours of US-EU cooperation in the Middle East and against China. Will it be transatlantic maqluba or muqlaba?

The US is also reaching out to Kazakhstan, offering to build local telecoms infrastructure. Central Asia looks increasingly contested space between Russia, the US, and China. And can Trump rebuild bridges with Indian PM Modi at the G7?

So much is in flux beyond oil, now back below $80 in time for the mid-terms. On which note, yes, ‘markets were right’ there – but to think it was market forces that kept market pricing of oil lower than feared until now is naïve: it was aggressive economic statecraft. If we see more Middle East war ahead, much more statecraft will be required.  

On that broader flux, that the FBI just arrested five people for an alleged plot to attack Trump’s White House lawn 80th birthday UFC event with explosives-laden drones and guns speaks to the zeitgeist.

So does the Wall Street Journal reporting that ‘A $40m Gold Heist Risks Exposing CIA’s Top-Secret Spy Programs’; as the Financial Times notes central banks are repatriating gold as global insecurity rises rather than storing bullion in other countries; and the Nikkei Asia shares that central banks expect their gold reserves to continue to rise as de-dollarization continues, with 84% of related survey respondents seeing such holdings increasing in the next five years.

And against that backdrop, the FT also notes that ‘The world is more dangerous. Why is risk cheaper?’, underlining that capital is piling into insurance because of high returns and low volatility (against our current backdrop!) which leaves some worried about mispricing.

Traditionally, they don’t have to worry because central banks are there to save the day. But right now, those knights in shining armour have a lot of other things to worry about: like swords and armour. Does that still allow them to just “ease in our time”?