Global Tension a Catalyst for Energy Assets

Last Tuesday’s release of September retail sales showed a monthly increase of 0.7% and above the 0.3% consensus following an upwardly revised 0.8% increase, from 0.6% in August. Excluding autos, retail sales were higher by 0.6% month over month, compared to a forecast of just 0.2%. Excluding gasoline, retail sales were still higher by 0.7%, and consumers are continuing to spend more than the Fed would prefer.

The report is a double-edged sword in that, while the strong retail sales data bodes well for third-quarter GDP forecasts, it weighs on future Fed policy — the higher-for-longer narrative that is the current accepted path for monetary policy. Industrial production for September also came in ahead of forecast, rising 0.3% versus consensus of 0.0%, and factors in the auto strike within the data.

Bond yields rose in reaction to the strong data, which in turn is keeping pressure on stocks from advancing. That, and further lingering uncertainty about the Israeli-Hamas situation, are keeping the market on edge. Even though bond yields are ticking higher, the market is trying to shrug off the “yields up, stocks down” syndrome — because at some point, good news (economic data) is good news for the stock market (potential strong earnings season).

The fluid events within the wars in the Mideast and Ukraine, coupled with new export restrictions on semiconductors headed to China and shaky bond auctions reflecting the rising intolerance of unchecked federal spending will keep the caution flag up for the bulls until earnings season can replace some of the geopolitical and bond market angst.

There will no easy and short-term solution to these four situations, but as history has shown, as long as those events remain outside the United States, the stock market can still trade higher. This is a very tough trading landscape that requires some extra attention to manage investing capital when fear is running high. The market will eventually resolve itself of these short-term concerns, but until then, it’s imperative to buy time.

Both the bond and stock markets are under severe pressure as the reality of entrenched wars in two theatres is taking a toll on investor confidence. As it would be, the war in Ukraine has been priced in long ago. The net impact of Putin’s invasion on the financial markets was in the form of an interruption in the sale of wheat and corn — driving up the price of food and pushing inflation in the United States higher.

Oil rallied short-term, but that was more OPEC+, which includes Russia limiting the supply of oil to the world, and yet selling discounted oil to China and India. The violence by the Iranian-allied Palestinian group is fueling new calls for the United States to choke off that revenue stream. “Without oil, they have no money,” Sen. Lindsey Graham said of the Iranians. “Without money, terrorism loses its biggest benefactor.”

Iranian oil exports have increased as a consequence of relaxed U.S. sanctions enforcement.

Now that Iran is literally getting away with murder in Israel, a full-blown blockade of Iranian oil should be considered as a military option if Hezbollah invades Israel. Energy analysts say Iran’s exports have increased four- to five-fold since 2020, with China emerging as its biggest buyer. That increase has come during a time when Biden has sought to ease tensions with Iran, including by trying to revive an Obama-era agreement meant to curb the Iranians’ nuclear weapons program. Thanks to the oil sales, the Iranians are “making billions of dollars,” former House Speaker Kevin McCarthy (R-Calif.) told reporters at the Capitol. “They’re using that wealth to fund terrorism.”

It is beyond clear that the current policy of appeasement to negotiate a nuclear deal with Iran and lax enforcement of sanctions is not working, and in fact is backfiring on long-term U.S. interests. Not knowing all the back-channel negotiations that are probably at extreme levels of intensity, for the United States to just sit there in the Mediterranean Sea with two battlegroups doing nothing sends the wrong message. Enforce the sanctions.

Until there are more bold initiatives advanced to thwart Iran, investors seeking geopolitically sensitive income that stays ahead of inflation may want to further their exposure to high-yield, energy income-producing assets. In addition to the Fed’s current policy statement, one can argue that energy prices will also remain higher for longer.

P.S. I will be holding a subscribers-only teleconference on Oct. 26 at 2 p.m. EST entitled “How to Profit from A.I. in an Uncertain Market.” The event is free to attend, but you have to register here first. Don’t miss out!