Written by Michael Every from Rabobank
The Intense Geopolitical Climate Beyond the Summer Heat
The current geopolitical landscape is filled with tension that could potentially impact the markets.
Following the expiration of the 60-day US-Iran Memorandum of Misunderstanding, both Trump and Iran have declined any extension while asserting dominance over Hormuz. Our assessment suggests that the US is unlikely to engage in significant military action until after the November midterms. (It’s worth noting that the US recently awarded a $23 billion contract to Raytheon to increase annual Tomahawk missile production to over 1,000 from the current 60, alongside a $59 billion deal with Lockheed Martin to boost Patriot interceptor output from 600 to 2,000.)
Trump’s public threat to bomb Oman aligns with Tehran’s private threats to ensure Muscat doesn’t close off the southern Hormuz passage, which facilitates ship-to-ship oil transfers that, according to the US, are experiencing substantial traffic. The Saudis are now offering oil near Oman, potentially following the lead of the UAE. However, this does not address the issue of refined products, where the US plans to announce measures to increase refiners’ throughput, possibly by operating at 120% capacity.
Diesel crack hits record $102. This is absolutely unprecedented.
The industrial economy may come to a standstill, or consumers could face the largest energy price increase in history pic.twitter.com/OtAdgrCvb3
— zerohedge (@zerohedge) August 17, 2026
As previously discussed, the relative energy stability may prompt Iran to escalate sooner. Israeli intelligence suggests that Tehran has made significant progress in its ballistic missile production by prioritizing military needs over civilian economic concerns. The Wall Street Journal reports on Iran’s preparations to incite unrest in the Gulf, disrupt undersea internet cables, further destabilize the Red Sea through the Houthis, and deploy troops to Kuwait to engage the US in ground combat. Despite US efforts to stabilize Lebanon (by disarming Hezbollah) and Gaza (by disarming Hamas), this situation could lead to destabilization across the entire Greater Middle East region.
Meanwhile, tensions persist on the Russia-Ukraine front. There is speculation that following the Duma elections on September 18-20, Putin may escalate by mobilizing forces and closing the border, potentially resorting to a tactical nuclear strike or a move against a Baltic state. The latter action could test NATO’s Article 5 commitment within Europe and from the US. This scenario could be coordinated with Iran.
North Korea might deploy an additional 50,000 troops to Ukraine. Meanwhile, South Korean President Lee, known for his friendly stance towards China, is proposing peace talks with North Korea, possibly influencing Trump’s decision to scale back joint military exercises. While this move may not have immediate consequences, it raises questions about US involvement in Asia. Japan’s recent revision of its national security doctrine following Putin’s visit to the Kuril Islands, which have been under Russian control since World War II, sends a clear message to Tokyo.
Recent reports indicate that the US is imposing ‘ideological loyalty tests’ on NATO members, including inquiries about their positions on Iran. This move could disrupt the post-WW2 transatlantic relationship, emphasizing US military guarantees over political disagreements. NATO’s core principles include deterring Soviet expansionism, preventing nationalist militarism, and promoting European political integration. The US appears to be encouraging Europe and Canada to reconsider global ideological threats and align with its agenda.
Additionally, the US has identified European countries among those aiding China in circumventing US tariffs through trans-shipment. With Canada facing potential 50% tariffs, the strategic choice is clear: establish a unified external tariff against China and trans-shipment or face higher US tariffs for non-compliance. The US is also urging its partners to choose between participating in its critical minerals and chip/AI initiatives or joining China’s World Artificial Intelligence Cooperation Organization. The EU’s adoption of a Chinese AI technology in its latest model underscores the complex geopolitical landscape.
For the markets, escalating military tensions in the Middle East could lead to surges in global energy prices. If Russia joins the escalation, the situation could deteriorate significantly. The uncertainty in Asia adds another layer of volatility. A major crisis in the global energy sector could prompt more drastic actions than the US’s current measures to boost refinery output. Geopolitical market fragmentation poses a real threat, as highlighted by Bloomberg’s observation that ‘The Americas’ Challenge to Middle East Oil Won’t Let Up.’
The current environment necessitates substantial increases in defense spending and a shift from ‘just in case’ to ‘just for me’ strategies, especially in tech and defense-related AI sectors. This shift towards a zero-sum approach could lead to inflation before potential cooperation emerges, potentially triggering a supply crunch in commodities like copper.
All of this unfolds against a backdrop of high public debt levels in most economies. Notably, US 30-year bond yields have reached 5.31%, the highest since July 2007; UK 30-year Gilt yields stand at 5.84%, the highest since May 1998; German 30-year Bunds are at 3.74%, the highest since August 2007;
Japanese 30-year JGBs have hit 4.12%, the highest since their introduction in 1999, compared to around 0.65% during the Covid crisis.
Reports indicate that private credit is under strain as non-performing loans reach levels last seen in 2007, just before the Global Financial Crisis. Japan’s life insurers are reportedly facing unrealized bond losses nearing $200 billion as yields rise.
In the past, central banks would intervene to stabilize markets, but the current circumstances present a challenge. How can central banks address the situation: through rate cuts that steepen the yield curve and shift towards short-term bills, rate hikes in an economy requiring more spending, yield curve control, rhetoric, or prayer?
In this new chaotic world order, Japan’s recent reliance on the US to lower the JPY temporarily highlights the complexities of the current financial system. If the BOJ opts to raise rates to support JPY, it could further impact its life insurers.
Moreover, a provocative op-ed in the FT suggests that the US dollar and US Treasuries may no longer hold their traditional status as global reserve assets. While this claim may be disputed, the implications of such a shift on the global financial system are substantial.
Until the geopolitical landscape stabilizes or a clear victor emerges, the situation remains volatile. While navigating through these challenges, remember it’s not just the summer heat that’s scorching out there. Stay cautious to avoid getting burned.