Geopolitical Risk Is Back As Libya And Israel Make Headlines

As if the global liquidity crunch was not bad enough (as we enter a vacation sleepy week, the key report on Monday will be the ECB's bond purchase update for last week - we estimate another E30 billion in secondary market monetizations, in addition to how many banks pulled dollars from the ECB in the 7 day liquidity providing operation on Wednesday as occurred first last week), geopolitical risk is back after headlines from both Libya and Israel indicate that the Levant region is on the verge of systemic instability once again. The first two stories put Israel smack in the middle of the Middle East action. First is Egypt, which earlier "said Saturday it would withdraw its ambassador from Israel, insisting the killing of five Egyptian security personnel while Israeli forces pursued gunmen across the border was a breach of its 1979 peace treaty with the Jewish state." Complicating matters is the announcement out of Iran, via AP, that "two American men arrested more than two years ago while hiking along the Iraq-Iran border have been sentenced to eight years in prison on charges that include espionage, state TV reported Saturday, a sharp blow to hopes their release was imminent. The announcement seemed to send a hard-line message from Iran's judiciary — which answers directly to the ruling clerics — weeks after the country's foreign minister suggested that the trial of Shane Bauer and Josh Fattal could clear the way for their freedom. It also was likely to raise speculation about Iran using the Americans as political bargaining chips and could bring added tensions to Iranian President Mahmoud Ahmadinejad's expected visit to New York next month." The cherry on top is late news out of Libya that the local rebel movement may be making headway (since denied by the government) in taking over Tripoli. Net result will be even more instability in the crude market which has been expected to drop courtesy of the recent spike in deflationary expectations. Alas, when geopolitics enters the equation, the only certain thing is a surge in uncertainty. That this will likely not benefit global equity markets goes without question.

Here is Reuters on the latest in the snafu between Israel and Egypt - a development that will certainly not hurt the political standing of the Muslim Brotherhood:

Israeli Defense Minister Ehud Barak said Israel regretted the Egyptian deaths, which followed attacks in its border area that had killed eight people and sparked the most serious crisis in ties with Egypt since Hosni Mubarak's overthrow in February.


"We hope that the ambassador will not be recalled," said Yigal Palmor, an Israeli Foreign Ministry spokesman. "He's still here."


Egypt's Foreign Ministry later called in the Israeli charge d'affairs, delivered a protest and demanded a joint investigation into the deaths, the state MENA news agency said.


It said the Israeli diplomat told Egyptian officials he had been asked by his government to read Barak's statement at the Foreign Ministry. The agency said the charge d'affairs was summoned because the Israeli ambassador was not in Cairo.


The Egyptian cabinet decision followed a crisis meeting attended by army generals and intelligence chief Murad Muwafi.


Egypt "lays on Israel the political and legal responsibility for this incident, which constitutes a breach of the peace treaty between Egypt and Israel," the cabinet said in an official statement posted on its website.


"The cabinet committee has decided to withdraw the Egyptian ambassador in Israel until the result of investigations by the Israeli authorities is provided and an apology from the Israeli leadership over the hasty and regrettable statements about Egypt is given," the cabinet statement said.

As for Libya, reports are very much conflicting: per CNN.

Libyan rebels have taken their fight inside Tripoli, home to embattled leader Moammar Gadhafi, a rebel spokesman said late Saturday.


"The revolution from inside Tripoli has officially started (Saturday) evening in many parts ... of Tripoli, and is expected to spread to all of Tripoli," said Jumma Ibrahim, a rebel spokesman from the western mountain region around Zintan.


But speaking a short time later, just before midnight in Tripoli, government spokesman Musa Ibrahim insisted that all is safe and well. He said that the Libyan capital remains under government control.


Heavy clashes broke out Saturday night in at least one Tripoli neighborhood, marked by intense gunfire, explosions and people screaming as they ran through the street, a resident told CNN.


Gunfire and explosions have become normal occurrences in Tripoli, but CNN personnel on the ground for weeks report that the fighting appeared to be among the most intense yet.

In the meantime, Reuters refutes the rebel position:

Small groups of armed rebels infiltrated the Libyan capital but have been dealt with and the city is safe, a spokesman for Muammar Gaddafi's government said on Saturday.


The spokesman, Moussa Ibrahim, said on state television that among the rebels arrested were Algerians, Tunisians and Egyptians.


Heavy gunfire broke out late on Saturday in Tripoli, which is encircled by rebel forces, and residents said anti-Gaddafi protesters were in the streets in several districts.

However events pan out, that this is happening 24 hours before FX markets open once again, just as the US is on the verge of another bear market, and many expect yet another major announcement out of the Fed w/r/t FX swap lines to sooth European liquidity concerns, this is hardly the upside case bulls were expecting.

As for the bears case, here is the latest positioning of US naval assets globally, courtesy of Stratfor. And please- nobody note that the US now has two aircraft carriers in the South China sea following the recent surge in jawboning between the two nations, even as Biden is currently in China . This is purely coincidental, even though Joe Biden is currently in China, reassuring the country "that the US is solvent."