The massive surprise attack on Israel by Hamas on Oct. 7 adds to an already fluid set of potentially destabilizing scenarios around the globe that only make investing in U.S.-based assets that much more attractive.
Hamas’s actions are an unprecedented attack that will result in a major escalation that has regional implications, beginning with how nations will view the long reach of Iran as a sponsor of terror in that part of the world. One thing is certain, the long-running Arab–Israeli conflict just got hotter.
The obvious, deep-set problems with Russia, China, and North Korea remain, but we can now add brewing trouble stemming from souring relations with Saudi Arabia that were triggered by the slaying of Jamal Khashoggi, a Saudi journalist and Washington Post contributing columnist since 2017. He was killed in 2018 in Istanbul at the consulate of Saudi Arabia. According to a U.S. intelligence assessment, Saudi Crown Prince Mohammed bin Salman approved the operation to capture or kill Khashoggi.
Due to recent rifts with China, Mexico has now overtaken China as one of America’s biggest trading partners, as the United States looks to import goods closer to home to minimize our previous reliance on China. Imports from Mexico now account for 15 percent of total imports, compared with 14.6 percent from China, per July trade data. Meanwhile, foreign direct investment in Mexico is up by more than 40 percent this year as U.S. companies increasingly shun China.
With that said, the crisis of illegal immigration at the southern border and the influx of fentanyl trafficked by the cartels, I believe, is being allowed to continue by Mexico’s government. The U.S. Drug Enforcement Administration acknowledges that there’s no question that transnational drug cartels operating in Mexico are fueling the explosion of deadly fentanyl on U.S. streets, and Mexican officials have refused to cooperate on efforts targeting fentanyl labs inside Mexico.
The trend of moving business out of China is picking up momentum. American companies are relocating to other Asian nations, with India being a newfound source of reshoring high-tech businesses. The restrictions on China are definitely putting pressure on that economy but it hasn’t slowed the Chinese Communist Party’s massive military buildup and its intentions of taking control of liberal-democratic Taiwan.
Also, there has been little progress on addressing China’s “seven deadly sins” agenda that prompted the staggering tariffs imposed on China. Those seven sins are the theft of intellectual property, forcing technology transfers, hacking, dumping, subsidizing, exporting fentanyl precursors, and currency manipulation. And what happened to addressing human rights abuses to the Uyghur and other persecuted populations? Beyond detentions, Uyghurs in the region have been subjected to intense surveillance, forced labor, and involuntary sterilization.
Each of these sets of geo-political circumstances looks like they'll deteriorate further before seeing any improvement or real change for the better. Considering the importance of each country, this argues that some of the rally in the U.S. dollar can be attributed to the broadly growing level of uncertainty in other nations. The other catalyst driving the dollar is the attraction of higher Treasury yields. The currency is following the yield curve, as the Treasury is selling record amounts of bonds to fund the federal deficit.
This flight to safety in the U.S. currency and short-term Treasurys is being accompanied by strong buying interest in investment-grade corporate debt with short maturities and U.S. equities in companies that have fortress balance sheets. This is why on some big down sessions for the stock market, as yields run higher, shares of the Magnificent Seven stocks and other blue-chip growth stocks trade higher.
As the earnings season begins this week, it'll be a relief to focus on the business of business and look for the market to move into a seasonally bullish time. Whether the market can fight through the ongoing macroeconomic and geopolitical headwinds is anyone’s guess, but Wall Street loves to reward upside surprises and strong forward corporate guidance. It should be interesting to see how all this unfolds.
