GeoMacro

Our "miniature stagflation" episode is coming together on the back of the Iran shock, China slowdown, and American political division.

The Iran war may not deescalate in the near term, and if it does, it will likely reescalate later this year, suggesting investors should take a cyclically defensive outlook.

Regional geopolitical risk is rising for Europe, EM Asia, and South Asia. We adjust our regional risk matrix accordingly.

China's slowdown coincides with at least a minor global oil shock – a combination we have long feared.

In this monthly iteration of our chartpack, we focus exclusively on just two questions. First, we present four scenarios for how the situation in the Middle East develops. Second, what happens if the pernicious scenarios come to dominate, how investors should play a global recession, were it to occur.

Close oil trades tactically, but beware lingering economic costs of the Iran war this year.

An energy price spike caused by a Middle Eastern war almost guarantees that Republicans will lose control of the House, and the chance of a Democratic Senate victory increases from 35% to 40%.

In the short term, there is plenty to be worried about in macro beyond the Middle East. The market was on thin ice before the Iran conflict. In the long term, the base case scenario remains bullish, but the war in the Middle East needs to be brief.

It is too soon to sell the rip in oil or buy the dip in stocks. Stick with risk-off trades for now.

The president did not announce significant new tax cuts or economic stimulus.