"A US Green Light To Strike Iran Harder Might Be Given If Trump Wins"

By Edwin de Groot of Rabobank

The attack by Israeli war planes on Iran Saturday was more limited than expected by many. Yet, Israel hit precise Iranian military targets while showing its ability to attack its nuclear scheme or oil. Projecting air power over distance and attacking Iran directly is not to be taken lightly even if this strike wasn’t the one markets feared. Iran is now vulnerable, its “ring of fire” around Israel extinguished (Hezbollah’s deterrence was supposed to stop a strike), and its regional reputation damaged. Even its ability to supply Russia with war materiel is now impacted. The ball is now in its court over whether it will drop its focus on Israel or escalate, especially via a push for a nuclear weapon. Biden had already promised US military aid to Israel as quid pro quo for a strike that doesn’t inflame the election; but after it, all bets are likely off.

A US green light to strike Iran harder might be given if Trump wins; and if Harris wins, Israel might proceed without US approval during Biden’s lame duck period. Oil prices were down more than $3/bbl this morning and we may see risk appetite supported by the events over the weekend. So, oil down, for now, but the geopolitical tensions between Israel and Iran are unresolved.

That the dollar actually strengthened (DXY up a tad this morning) is more likely to do with the increased political instability elsewhere in the world. In Georgia, the biggest ruling (and Kremlin-friendly) party Georgian Dream won 54% of the votes, according to the election commission. Its leader declared victory whilst the Georgian President, who is a supporter of greater EU-ties but lacks political power, called it a “Russian-style election”. At face value, it seems that Europe should not expect much rapprochement from the country any time soon. A similar thing could probably be said of Bulgaria, which just concluded the seventh election in four years. The Gerb party won, but with only 26% of the votes. The runner-up party took just over 15% of the votes, and so both together wouldn’t garner a majority. The third (far-right) party is a Kremlin-friendly one, and other than that there is a host of smaller parties. So political stability in Bulgaria seems far from assured.

But the biggest political shock took place in Japan over the weekend, with the country entering a fresh phase of political uncertainty. Japanese Prime Minister Ishiba should probably have asked French President Macron some advice before he decided to call snap elections two weeks ago, as his gamble – too – backfired. The LDP and its coalition partner Komeito lost a significant number of seats in the ballot held on Sunday. And with 215 seats (down from 279) they came well short of the required 234 for a majority. The key reason for calling the election was a slush-fund scandal, association with which the LDP has been trying to shake off. It also means that Ishiba, in search for a majority coalition, may not be keen to rely on some LDP members that were kicked out of the party – and became independent members of parliament.

To form a stable coalition, the Prime Minister will now most likely have to broaden his coalition. That will not be easy given the number of seats he needs and the scattered landscape beyond the main opposition party CDP, which secured 148 seats according to NHK. Another option would be a minority government with limited partner agreements. Whatever Ishida’s next steps are, it seems likely the recent direction of policy, which included a focus on restoring public finances, will face pressure. Indeed, opposition parties have been pushing for more fiscal support for households who have been struggling with higher bills as wage increases have not kept up with the pace of cost of living increases. Moreover, Japan’s more hawkish posture with respect to defence and international partnerships with NATO members and even the BoJ’s plan to gradually return to a more normalized monetary policy, are likely to be challenged.

Market implied policy rates suggest a hike this week is quite unlikely (a less than 5% probability) but also for December the market only sees some 20% likelihood of a hike. Last week this was still seen as somewhat under 40%. Reflecting uncertainties, the yen fell to its lowest level against the dollar since the end of July, with USDJPY nearly hitting 154 this morning. This is likely to draw increased attention to the BoJ’s rate setting meeting this week.