Energy Price Cuts And A Reviving Global Economy Are On The Way If Biden Can Get Putin To Make A Deal With Iran: The Geopolitical — Stock Market Connection

Falling gasoline prices are helping the US economy but can’t come fast enough for Europeans facing off with the Russian bear and a potentially cold winter. Should Biden corral the vaunted P5+1 group of powers and bring Iran back into the global order then the American and European consumer will be singing at the pump while the abortion-focused Democratic Party would have even greater chances of winning in November. And a deal would pave the way for a return to global investor confidence in 2023 that could feasibly send the markets back to their January 4 highs. But for now equity investors are fighting too much price volatility to take much notice of equally volatile negotiations. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days before falling significantly as earnings season gets underway in October.

Biden’s earnest efforts to revive the JCPOA with Iran play an important role in stock market valuations in 2023 and the long run. The deal clearly lowers oil prices but also invokes the broad geopolitical order and the staying power of Putin. Because Putin needs Iran back in the global economic order the deal will likely get done and help consumers and by extension global GDP. But it would also give Putin an economic and military lifeline at a time he dearly needs it. These two effects largely cancel each other out insofar as 2022 equity market dynamics are concerned.

As The National Interest notes: “Even if the Agreement reduces Russia’s leverage over Europe, Moscow may benefit from the revival of the accord in five ways. If Washington lifts banking sanctions on Iran, Moscow can access the international financial network through Iran. Second, the sanctions relief in the deal enables a $10 billion contract between Moscow and Tehran to build a nuclear site in Iran. Third, with the expired sunset of the UN arms embargo against Tehran, Russia can now sell Tehran a wide array of conventional weapons that may be worth billions of dollars. Fourth, over the last few months, Tehran and Moscow have engaged in extensive negotiations to expand their cooperation in the energy sector. Finally, a massive injection of cash into Iran’s coffers means that Tehran may be able to offer more help to Russia for its war in Ukraine.”

Biden is essentially preying on Putin’s present vulnerability to get his support for the JCPOA, on the bet that the long-term consequences will support the liberal world order and hurt the Eurasian autocrats. Putin benefits from a sanctions-free Iran but only in the short-run, since the ongoing protests show the Iranian people clearly incline towards western liberalism while its theocracy detests any deal with the US. By reviving US-Iranian relations and supporting Iran’s private sector economy, the deal not only contradicts the Theocracy but empowers an already fed-up Iranian populace to demand a return to moderate leadership and fair elections.

By reviving the JCPOA Biden helps Asian and European consumers and thus boosts global GDP at a critical time, while marginally lowering US fossil fuel export prices to Europe and thus maintaining the alliance against Putin. These factors help US equity valuations but since the deal also helps Democrats and hurts energy profits the likely hit to both investor sentiment and S&P earnings is marginally negative. So the short-term impact is neutral, while the long-term impact is positive on the contingency that Ukraine continues to batter Russia’s military and the sanctions decimate the Russian economy. This is a safe bet and lends credence to an eventual return to confidence in the liberal world order in 2023. Until then both the geopolitical order and equity markets are fraught with risks and face the growing probability of a financial break in some esoteric corner of global Wall Street.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which still nets out to a meaningful short position in equities.