Iran responds

Posted by: Paul Donovan

08 Jan 2020
  • Iran has responded to last week's US action with missile strikes against US-Iraqi military bases. There was a knee-jerk reaction in financial markets, with oil and gold prices rising. However, a response was expected by investors, and the initial market moves seem hard to justify.
  • The economic impact of oil is not what it was in 1973. It takes less oil to produce a dollar of global GDP today. Oil price increases transfer money from oil buyers to oil sellers. In 1973, oil sellers saved the money (demand negative); today, they spend it. The main economic impact may be higher inflation perceptions by consumers, which might mean higher wages.
  • German factory orders numbers are due. German manufacturing had a dismal 2019, as US President Trump's trade taxes created uncertainty, which weakened global investment. It was not a good time to be a manufacturer of investment goods.
  • In the interminably tedious EU-UK divorce, UK Prime Minister Johnson will meet one of the EU presidents. Johnson will explain that the UK would like to make it more costly for UK firms to export to Europe, with a free trade agreement but no regulation coordination. Regulation is generally a bigger barrier than tariffs for global trade.

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