Oh, The Places You Will Go

By Michael Every of Rabobank

Oh, the places you’ll go

You have brains in your head.
You have feet in your shoes.
You can steer yourself
any direction you choose.
You’re on your own. And you know what you know.
And YOU are the guy who’ll decide where to go.

Asian and European stocks closed in the red yesterday following a Wall Street Journal report that Donald Trump had approved a plan to attack Iran, but was withholding final authorization in the hope that Iran would agree to abandon it’s nuclear program.

The US has recently moved substantial military assets into the region, including the USS Nimitz carrier strike group (bringing the number of carrier groups in the region to 3), up to 30 tanker aircraft, and several B2 bombers deployed to the Diego Garcia Indian Ocean base. The BBC reports that the B2 is capable of carrying the ‘Massive Ordinance Penetrator’ (MOP) bunker buster bombs that may be suitable for striking Iran’s Fordo nuclear facility, located Dr Evil-style under a mountain.

Trump took to Truth Social yesterday to rubbish the report, saying “The Wall Street Journal has No Idea what my thoughts are concerning Iran!”

You’ll look up and down streets. Look ‘em over with care.
About some you will say, “I don’t choose to go there.”
With your head full of brains, and your shoes full of feet,
You’re too smart to go down any not-so-good street.

White House Press Secretary Karoline Levitt told journalists on Thursday afternoon that President Trump would make a decision on strikes within the next two weeks, prompting something of a recovery in US equity futures, a selloff in the DXY index and a minor reduction in US, Aussie and Kiwi bond yields. The decision will be complicated by the fact that Trump ran on a platform of ending “forever wars”, especially in the Middle East.

With the US only recently having extricated itself from a decades-long deployment in Afghanistan, prompting the country to fall swiftly back into the status quo ante bellum, the last thing the President needs is to get bogged down in another extended conflict in the Middle East.

Trump recently posted “UNCONDITIONAL SURRENDER” to Truth Social while also claiming that the US knows exactly where Iranian Supreme Leader Khamenei is hiding. Having reportedly dissuaded Israel from attempting assassination of Khamenei, Trump said that the US will not “take him out… at least for now. But we don’t want missiles shot at civilians, or American soldiers. Our patience is wearing thin.” That patience may be wearing even more thin after Iranian missiles struck an Israeli hospital in Beersheba yesterday, and Israel has again raised the prospect that it may seek to target Khamenei unilaterally.

And you may not find any
you’ll want to go down,
In that case, of course,
you’ll head straight out of town.

In a recent interview with Tucker Carlson, former Trump Rasputin Steve Bannon railed against the prospect of US strikes on Iran. Bannon urged Trump to resist pressure from Neocons to step up American involvement, arguing that the idea runs counter to the Trump program of rolling back the imperial frontier and focusing on ‘hemispheric defense’ of the American homeland.

You will come to a place where the streets are not marked.
Some windows are lighted. But mostly they’re darked.
A place you could sprain both your elbow and chin!
Do you dare to stay out? Do you dare to go in?

Trump now faces something of a Sophie’s Choice. If he declines to initiate strikes Iran could plausibly sprint for a nuclear weapon that would pose an existential threat to Israel and perhaps encourage Saudi Arabia to pursue nuclear arms of its own. If he conducts limited strikes on Fordo and elsewhere they may not succeed in destroying Iran’s nuclear program and the Hydra’s heads will undoubtedly grow back, leaving America to face the same conundrum again in the future. If he opts for extensive involvement and possible regime change, he runs the risk of squandering American blood and treasure in another Middle Eastern quagmire, fracturing the MAGA base and creating a power vacuum in central Asia with the potential for fissile material to remain unaccounted for. This could look like Russia in the 1990s, but worse.

And IF you go in, should you turn left or right…
or right-and-three-quarters? Or, maybe, not quite?
Or go around back and sneak in from behind?
Simple it’s not, I’m afraid you will find,
For a mind maker-upper to make up his mind.

Meanwhile, representatives of France, Germany and the UK will hold talks with Iran’s Foreign Minister today in what the FT describes as a last ditch attempt to prevent escalation of the conflict. UK Foreign Minister Lammy will reportedly deliver a US message that the diplomatic route remains open, with some prospect of reviving a deal for Iran to continue its nuclear program under international supervision.

Such a deal would have more than a few hairs on it given Iran’s history of illegally carrying on enrichment activities well beyond the level required for civilian applications at facilities kept secret from international inspectors. Iranian enrichment capability has been a red-line for both the US and Iran. Consequently, Iran may gamble that the US has no stomach for direct strikes and will revive its negotiating tactic of 20 years or more: waiting out Western powers in the expectation that if a deal is not agreed, more favourable terms will be offered soon enough.

Headed, I fear, toward a most useless place.
the Waiting Place…
…for people just waiting.

Markets are now in that useless waiting place. Brent crude had been remarkably stable throughout the Asian session yesterday before catching a bid from the European open. Prices are down a little more than 2% this morning. European gasoil futures have plunged 4.5% since market open, but remain more than 4% higher over the last 3 trading days as markets judge that Europe is likely to be among the biggest losers from possible interruptions to Middle Eastern energy supplies. A similar theme is playing out in Dutch TTF natural gas futures.

I’m afraid that some times
you’ll play lonely games too.
Games you can’t win
‘cause you’ll play against you.

In other market-related news the Bank of England kept the Bank Rate unchanged at 4.25%. That outcome will shock nobody, but the 6-3 vote split was a little more dovish than previous 7-2 splits and perhaps signals that a consensus is building for a cut in August. The limits of monetary policy may again be explored if Iran makes good on renewed threats overnight to close the Strait of Hormuz. Unfortunately, central banks can’t print oil or gas.

Meanwhile, ahead of next week’s NATO summit, Spain has balked at NATO Chief Mark Rutte’s plan for 3.5% defence spending, describing it as “unreasonable” as it would be incompatible with Spain’s welfare state and vision of the world. The penny seems to have dropped on guns or butter choices, and Spain wants to choose butter.

That comes as the EU is reportedly considering a UK-style trade agreement with the US with a 10% reciprocal tariff and negotiated export quotas to avoid sectoral tariffs. Will Ursula von der Leyen be able to get even that deal over the line if Spain is recalcitrant on defence?

Elsewhere, in another hit to elegant ideas of Ricardian free trade, Canada has just announced tariff rate quotas of 100% of 2024 levels on imports of steel products from non FTA origins, applied retroactively. The Canadian government has also said that it will put in place local content requirements for government projects and will increase tariffs on US steel and aluminium from July 21st to match US duties on Canadian product. That is sure to go down poorly in Washington.

So, while the world remains on tenterhooks over whether or not the US will bomb Iran’s nuclear mountain lair, the paradigm shift in global trade and economics continues. Let us join the dots for you by saying that geopolitics and geoeconomics are now the same thing, and attempting to negotiate them separately is unlikely to work.