Geopolitical Factors Drive Markets - Iran Event Nears

Geopolitical issues dominated the news flow last week, driving the stock market down approximately 2% and oil prices up roughly $10.

First, Let's Note the Inflation Factor

Like the Beastie Boys use to say, "It's the new style," new style concern that is, as inflation takes the baton from recession. The European Central Bank (ECB), Bank of England (BOE) and International Monetary Fund (IMF) all pounded that fear down the market’s throat this past week again. That led to an early end to the nascent dollar rally, as The Greek forecast it would just one week earlier. The dollar actually closed the week (EURUSD: 1.55) about where it started it, but ended the period losing some of its earlier gains.

The Geopolitical Factor

Among the catalysts behind the move in the markets, one that certainly had something to do with the double-digit rise in oil prices and decline in stocks, was intensified geopolitical tensions. Stocks sold off on the week, with the Dow Jones Industrials declining 2.4%, the S&P 500 falling 1.8% and the NASDAQ Composite drifting 1.3%.

The market started falling even before the central bank decisions and fear-inducing press conferences. Geopolitical issues and petroleum and gasoline price rise were very likely catalysts behind the market’s dismay. What started during the prior week, with Turkish air raids on Kurdish rebels, and the resulting Kurdish threats of retaliation against American forces in Iraq, continued this past week with new catalysts.

Geopolitical tensions seemed to spread and intensify all week long. The Supreme Leader of Iran announced that his country would not back down to international pressures, and would continue forward with its nuclear program. That same day, a U.S. general declared that America was incapable of engaging Iran now, with fires to put out in both Iraq and Afghanistan.

As if that was not enough, Nigerian petroleum production and distribution came under further stress, as rebels attacked infrastructure in the major petroleum-producing nation. By the end of the week, attention had turned to Venezuela, as The Wall Street Journal reported that it had evidence implicating President Hugo Chavez of actively assisting Colombian rebels.

Meanwhile, a very interesting event is taking place in Lebanon, where Hezbollah has taken over parts of Beirut. The timing of this Hezbollah offensive is very suspect, as perhaps Iran's allys in Lebanon seek to solidify a front for the foreseen conflict ahead.

At the same time, the tiny Republic of Georgia declares that war with Russia is a very real possibility. If I may go out on a tangent for a moment, The Greek very much expects Russia to use the chaos and scrutiny that may result from U.S. involvement against Iran to advantage in its political arguments with Georgia. I fully expect the borders of Abkhazia and Ossetia to end up dominated by Russian troops, and the BTC pipeline to be left in ruins before Russia is finished with this story.

Oil Price Move is Counter to Inventory and Dollar Trend

Take note, there seems to be a clear underlying driver behind last week's oil price movement that is counter to supply trend. After all, petroleum inventories increased sharply again this past week, rising by 5.7 million barrels. Meanwhile, just weeks after Israel staged a nationwide drill more intense than any in its history, Wall Street Greek hears of a closed-door Federal Advisory Committee meeting of the U.S. Nuclear Command and Control System Comprehensive Review Advisory Committee scheduled for early June.

Yes, we mean to insinuate that the bombing of Iran may not be very far off, and may be playing a role behind the rise in oil prices. Goldman Sachs (NYSE: GS), an investment bank often in the know, this week reported expectations for an oil price spike to $200 in the next year or two, and a natural gas price spike as well. These happen to be views The Greek concurs with, due solely to our expectation for a messy confrontation with Iran that could hold some surprising repercussions for the world. So, along with Goldman, some very "smart money" might be behind the counter moves in oil and stocks.

We would not be surprised to discover significant builds across sovereignties in the know. China, of course, is actively growing its own strategic oil reserve. The timing of the events in Israel, the U.S. and Lebanon, escalating Russian pressure on Georgia, and the counter trend move in oil prices and inventory build, while at the same time the dollar had hardly budged by week's end, all point to something else.

Israel Will Do the Initial Bombing

Israel will not allow a volatile, threatening and unpredictable neighbor to gain nuclear weapons capability, or it will at least do everything in its power to prevent that. And, Israel is also not likely to wait for a change on Pennsylvania Avenue to act, because that change could significantly alter the position of its ally in the United States. It at least increases uncertainty, and that uncertainty can be overcome by Israel's acting sooner rather than later. Our timeline is somewhere between the middle of June and end of September. For those who may still view this kind of writing as alarmist, or even delusional, I suggest you wake up from your placid dream state and realize your new reality.

Please see our disclosure at the Wall Street Greek website. Article interests (AMEX: PPA, AMEX: DIA, AMEX: SPY, AMEX: QLD, AMEX: DOG, AMEX: SDS, Nasdaq: QQQQ)