Middle East Escalation--What to Watch//VP Debate//October Surprises

In the last 24 hours, Israel commenced “limited” ground incursions into Lebanon, Iran fired 180 precision ballistic missiles at military targets inside Israel, and American Vice-Presidential hopefuls JD Vance and Tim Walz met for their only televised debate.

With under 5 weeks to go until US elections, we have officially entered the period of the “October Surprise”: the risk that a late-breaking shock event impacts the trajectory of the vote. We begin the month with a selection of possible triggers, from conflict escalation in the Middle East, to the Longshoreman’s strike, to Hurricane Helene. And then there are the “unknown unknowns” that may yet transpire.

Of these, we regard the Longshoreman’s strike as presenting the greatest source of US political risk, given its potential to disrupt trade (with 45,000 workers and 36 US ports on the East and Gulf coasts affected) and collide with President Biden’s pro-union instincts, testing his reluctance to enforce the Taft-Hartley act, which can be invoked if the president declares a strike a national economic emergency. In the narrowest economic sense, the impact of the strike would not be apparent on consumer prices and sentiment until after election day, but politically it could be disruptive and damaging to the White House and to Harris by extension.

“I will cripple you”: Harold J. Daggett, President of the International Longshoreman’s Association (September 2024)

What will not move the needle on the US election outlook is last night’s VP debate, surprising mainly for its relative cordiality. This I attribute to what is known as “Midwestern Nice” (Vance being from the US state of Ohio and Walz from Nebraska/Minnesota). This warmer, friendlier vibe could help to soften impressions of Vance, who comes across as harsh and judgmental in his frequent TV appearances, but it probably doesn’t do much to help Tim Walz, who already has strong favourability ratings with US voters.

Will this matter? Considering that the two assassination attempts against former President Trump have already faded from memory, I don’t think anyone will be talking about the VP debate beyond sundown today. Neither candidate landed a “knockout” blow, and neither made a significant unforced error, though Walz is the weaker debater.

How did the VP debate impact US voters’ perceptions?

The Middle East Conflict Escalates: What to Watch for Next  

Without diminishing the extremely dangerous situation in the Middle East, Iran’s response last night was in line with the expectations we outlined in our last note. The scale of the Iranian response was significant and more threatening than the April attack against Israel, which is important in military signaling terms.  The death toll was minimal (one casualty), and the targets chosen were military.

Oil prices have shown a modest response, rising from $72 to $75 per barrel, underscoring that the geopolitics/oil price link is not completely broken. Tellingly, the enquiries we are fielding from clients are more focused on the outlook for a wider regional war. To answer that question, we must assess the strategic calculus of both sides.

We are currently in a phase where Iran is responding tactically and is on the back foot, with Israel’s increasingly brazen and sophisticated attacks exposing the regime’s vulnerabilities (and the Iranian regime is deeply unpopular at home).  Israel is taking advantage of what it perceives to be a window of time where it can both degrade the capacity of its adversaries and rebuild its deterrence threat ahead of the October 7th anniversary of the Hamas attacks and before US elections.

Will Israel “go hard” against Iran in response to the missile attack?

With Francine Lacqua on Bloomberg’s The Pulse:

Both sides want to avoid a full-blown state-to-state conflict, but their motivations for doing so differ—as does their respective risk appetite. They will therefore attempt to focus their activities below the threshold of triggering military conflict while inflicting maximum damage and telegraphing their capacity to inflict even more. It is a finely balanced and high-risk proposition.

What would change the outlook and trigger a wider regional conflict and potentially global systemic risk? This is what really matters for markets and for global business.

Key Flashpoints Signaling Conflict Escalation, In Order of Impact:

1. Hard evidence of Russian/Chinese military support for Iran  
2. Israeli attack on Iran’s energy infrastructure
3. Attack by Iran and/or its proxies on an Israeli population centre or US assets
4. Israeli attack on Iran’s nuclear facilities

I do not think any of the last three outcomes are likely in the short-term, but they are all material probability events over the medium- to long-term. We should expect a continuation of the cycle of attack and counter-attack for the foreseeable future. Post-US elections, the combatants will recalibrate, and in some cases, test the new administration (along with other “challenger” actors).

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