One key question that emerges from the Trump-Putin summit in Alaska is whether Russia’s goals were actually to simply buy time and delay the major oil sanctions poised to go on for their sales or alternatively give the US a diplomatic defeat after ramping up global expectations for a peace deal. In this view so the account might go either Trump is strung along month after month and sanction’s delayed or he loses prestige by failing at one of his campaign goals. Either way a win for Russia while it tries to win on the battlefield what it cannot get from more limited diplomacy.
But of all the Presidents of the US the current resident of the oval office is perhaps the least playable.So whatever the strategy of Russia here Trump has now pre-empted it with an announcement that if no deal is reached within the next two weeks the new severe oil sanctions kick in.
What could this mean for markets and should markets take these threats seriously? Let’s start with the latter question. The answer is yes they should take very seriously potential upcoming events. Trump showed in the case of Iran’s nuclear program which had a similar limited time threat that it would be foolhardy not to take him at his word.
If severe sanctions on Chinese and Indian oil purchases are implemented the effects on markets could be severe. The next two weeks could be as a result highly volatile for them and especially for the oil sector. Let’s run through a few possible results .
- Peace deal, Bullish for markets but at least shorter term perhaps quite bearish for the oil sector..
- No deal. Very bullish for oil. Bearish for China and India who get severe oil sanctions if they purchase Russian oil or in the least higher oil prices as Russian oil goes off-line.
- The oil markets and overall markets were quite bullish Friday on Powell’s Jackson Hole confab change of position on cutting rates. One reason for this change is that inflation has been relatively tame. And a key reason for that has been a remarkably lower price for oil overall which effects every aspect of the economy. If oil goes up as a result of sanctions and less available supply does that inflation gain go away and the likelihood of a Fed cut is consequently greatly reduced?
- If oil inflation kicks in and Fed cuts don’t occur will the stock market do badly at least for a while?
- While oil sanctions push oil up will inflation risks and no Fed cuts be head-wins for the sector though overall the results are bullish?
- And here’s the real wild card. Will sanctions on Russia oil then lead to further pressure on Russia from two of its biggest trading partners and make a peace deal ultimately more likely?
- Will Russia calculate that the damage to the US economically from higher oil prices will outweigh any ability of the sanctions to hurt its economy? Such calculations are particularly pertinent since the original fall of the Soviet Union may have been hastened by the US severely dropping the price of oil.
- And how will the allies react to a breakdown of the peace process?Right now there is a very strong economic and military partnership in play between the EU and US. This seems likely to continue with the new trade deal and new agreements regarding the importance of NATO But how will the alliance respond and could the Russian’s definitely want to limit the success of this alliance or see it as a partial return to a cold war footing with certain realist advantages to both sides longer term if no peace deal is made.
All of this means and this is a recurring theme with the fast moving US president that the next two weeks are extremely important. Are market participants recognizing this enough? One wonders. As this site keeps trying to make apparent politics matters tremendously for markets and these days even more so.
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