Democracy Manifest

By Benjamin Picton, senior market strategist at Rabobank

US stocks defied a strong lead from Europe and Asia on Friday to close broadly in the red. IT, telecommunications and the consumer discretionary sector led declines while energy, materials and consumer staples performed well. Oil prices surged following further reports of attacks on shipping in the Strait of Hormuz, with Iran claiming that two tankers carrying up to 4 million barrels of crude were struck by marine mines. The BBC reports UKMTO figures noting that the number of ships being attacked in and around the Strait hit a new high of 12 vessels in the week to the 11th of October.

Rising oil prices helped to see ten-year Treasury yields close 1.5bps higher at 5.07% after a big drop on Thursday. Two-year yields fell by 3bps, causing a steepening of the yield curve that might have provided a slight tailwind to financial stocks. Higher oil prices and rising long yields were not helpful for the consumer discretionary sector that was perhaps still trading off the signal of a weaker-than-expected retail sales report released the day before, which gave the impression that spending on automotive fuels is cannibalising demand for other goods.

Following market close on Friday news emerged that President Trump is enacting a waiver of steep Graham Act sanctions and tariffs that were due to come into effect. The Act requires the imposition of secondary sanctions in the form of 100% tariffs against the top five buyers of Russian crude oil and gas products while also placing 500% tariffs on Russian energy products being imported into the United States. Active Brent crude futures are down by $1.80/bbl at time of writing.

Depending on how the calculation is performed, the top five buyers of Russian energy products are likely to include China, India, Turkey and the European Union. The imposition of 100% tariffs on China would certainly torpedo the truce in the trade war that was extended to January only a few weeks ago and would risk a response in the form of renewed export restrictions on rare earth minerals. 100% tariffs on the EU and Turkey would be a major strike against NATO allies at a time when the Trump administration wants Europe to contribute more to collective defence and Turkey to play ball with US interests in the Middle East. Striking India would antagonize an emerging great power that the USA would like to use as a geopolitical counterweight to China in the Indo-Pacific, an investor in new US production, and a customer for US defence and nuclear energy exports.

Of course, the imposition of Graham Act sanctions would also directly contradict recent efforts of the administration to reduce fuel prices ahead of the midterm elections. Relations between Moscow and Washington appear to be in an upturn following the recent controversial deal for the US to import Russian diesel sanctions-free over the coming months. That deal drew condemnation from Ukraine and several members of congress, as did Friday’s decision to waive the Graham Act sanctions. In a post to Truth Social on Sunday President Trump said that his decision was aimed at avoiding anything that will “drive, foolishly, Russia away from the bargaining table”.

Secretary of State Marco Rubio indicated over the weekend that the waiver was only for a period of 60 days to give the US time to “analyze what imposing both sanctions and tariffs will mean to the global economy and even the US economy”. Some might detect an implied threat that while buyers of Russian energy have avoided the sanctions for the time being, the Sword of Damocles still hangs, and the administration now has greater powers to coerce other countries into doing what it wants.

Rubio’s 60 days would expire after the midterm elections, which is the line in the sand that President Trump has repeatedly nominated when saying that the US would not engage in fresh strikes against Iran before that date. Once the midterms are out of the way, it looks like all bets are off and we can expect a dramatic ramping up in geopolitical volatility. That impression was seemingly confirmed last Thursday when President Trump again implied in an interview with Newsmax that the United States was considering striking Iran’s Pickaxe Mountain complex, where nuclear centrifuges from the Natanz site are thought to have been relocated.

An IRGC spokesman said in a post on X that any attack on Iranian energy infrastructure would trigger a “scorched earth” response against Israel, with other Iranian sources suggesting a ‘nuclear for nuclear’ attack on Israeli reactors if Pickaxe Mountain were to be struck. Israeli Prime Minister Netanyahu – freshly endorsed for re-election at next week’s poll by Donald Trump – said that the Islamic Republic must be toppled and that he had directed Israel’s security agencies to pursue that goal, without US support if necessary.

While the world grapples with the energy shock emanating from hot wars in Europe and the Middle East, French President Macron continues to grapple with political unrest at home. Tensions ran high over the weekend as widespread protests erupted into rioting and looting, with images of the burning of the historic town hall in Limoges circulating on social media and about 1000 police officers reported injured.

President Macron said in an address to the nation that a distinction must be drawn between the actions of the rioters and the legitimate concerns of protestors demonstrating against rising living costs and decaying public services. Marine Le Pen, the right-wing frontrunner for the upcoming presidential election, railed against what she called “exhausted Macronist power” saying that France faces a crisis of confidence and authority that now poses a threat to democracy.

Hungarian Prime Minister Peter Magyar echoed sentiments expressed by Donald Trump blaming the riots on uncontrolled immigration, claiming that the scenes in France vindicated Hungary’s tough approach. Polish Prime Minister Donald Tusk – avoiding explicit mention of France -similarly extolled the virtues of his own country’s hardline stance on immigration, saying that Poland would “neither repeat nor pay for” other countries’ mistakes. The Euro is this morning trading lower despite a broad US Dollar selloff.

Keeping with the theme of democracy, today is an important date in the Canadian province of Alberta. A non-binding referendum will be held where voters are asked to indicate whether Alberta should remain a province of Canada or commence the constitutional process to secede. Voters will also be asked a series of questions about their views on control of immigration, voter ID, and to what degree non-citizens should have recourse to public healthcare and other social programs.

Needless to say, the results of the vote will be closely watched in Ottawa, and in Washington D.C.