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Mission Grey Daily Brief - August 15, 2024

Summary of the Global Situation for Businesses and Investors

Ukraine's incursion into Russia continues, with Kyiv's forces advancing further into Russian territory. This has boosted morale in Ukraine, but the outcome remains uncertain, and Ukraine is facing challenges in the Donbas region. Meanwhile, Venezuela's election crisis has sparked fears of a mass exodus, and Panama's President Mulino is working with the US to address migration challenges and restore democratic norms in the country. In other news, Ecuador's mining industry has been marred by violence, and Brazil is facing a hydro crisis due to severe droughts, impacting global hydropower generation.

Ukraine's Incursion into Russia

Nine days into Ukraine's incursion into the Kursk region, Kyiv's forces have made significant advances, capturing about 400 square miles of Russian territory. This offensive has dealt a psychological blow to Russia, exposing vulnerabilities and causing internal tensions among Russian military units. Ukraine's use of Western-supplied equipment and weaponry has been effective, with reports of Ukrainian troops driving American Humvees and utilizing powerful electronic warfare tools. This incursion is likely aimed at multiple goals, including boosting morale, causing political headaches for the Putin regime, and diverting Russian resources from the Donbas region. The ultimate outcome of this offensive remains uncertain, and Ukraine is facing challenges in the central section of the Donbas oblast, where Russian forces have been advancing steadily.

Venezuela's Election Crisis

Venezuela is facing a political crisis following the July 28 elections, with concerns about the vote-counting process. The situation has sparked fears of another mass exodus, similar to the one that occurred during the country's previous political turmoil. This could have significant implications for the region, and President Biden of the United States has expressed commitment to working with Panama to address migration challenges and restore democratic norms in Venezuela.

Mining Violence in Ecuador

Ecuador's mining industry has been marred by violence, with at least five people killed and three injured in an armed assault at a mine in the country's southern Azuay province. The region has seen an 82% increase in murders this year, and authorities have imposed a "state of exception" and a curfew to combat organized crime and violence. This incident highlights the challenges and risks associated with mining activities in Ecuador, particularly in regions with expanding legal and illegal mining operations.

Brazil's Hydro Crisis

Brazil, the second-largest producer of hydroelectricity globally, has been forced to shut down two of its largest hydroelectric power plants due to severe droughts. This has contributed to a global hydro crisis, with droughts impacting hydropower generation worldwide, including in China and the US. Brazil's situation is expected to persist until November 30, and the country is shifting to thermal power sources and importing electricity from neighboring countries. The hydro crisis has led to an increase in global emissions as countries revert to conventional energy sources.

Recommendations for Businesses and Investors

  • Ukraine's Incursion: Businesses with operations in Ukraine and Russia should closely monitor the situation and be prepared for potential disruptions. The conflict's outcome remains uncertain, and businesses should develop contingency plans, especially if they have supply chains or assets in the affected regions.
  • Venezuela's Crisis: Investors should exercise caution when considering opportunities in Venezuela due to the country's political instability and potential for further turmoil. Focus on sectors that can provide stability and support, such as humanitarian aid and migration management.
  • Ecuador's Mining Industry: Businesses involved in mining or considering investments in Ecuador should be aware of the security risks, particularly in regions with expanding mining activities. Enhanced security measures and collaboration with local authorities are crucial to mitigate the risks associated with illegal mining operations.
  • Brazil's Hydro Crisis: Companies relying on hydropower in Brazil and other affected countries may need to explore alternative energy sources or supply chain adjustments to ensure resilience and minimize the impact on their operations.

Further Reading:

As Ukraine’s Kursk incursion forges on the stakes are rising for both sides - The Guardian

As fallout surges from Venezuela's election crisis, the region fears another mass exodus - Lewiston Morning Tribune

Biden, Panama's Mulino Discuss Key Issues in Call - Mirage News

Brazil cuts hydro use as droughts continue impacting global hydro generation - Power Technology

Five killed in armed assault at Ecuadorian mine - Social News XYZ

How Ukraine Caught Putin’s Forces Off Guard in Kursk — And Why - New Lines Magazine

Themes around the World:

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Foreign Investment Surge

Thailand has seen a 42% year-on-year surge in foreign investment applications, reaching US$21.7 billion in the first nine months of 2024, the highest in a decade. This reflects growing confidence in the Thai government's policies and improved business regulations. Foreign investors play a significant role in the Thai stock market, impacting liquidity, market sentiment, exchange rates, sectoral dynamics, and long-term stability.

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US-China Military Conflict

China's military drills around the Taiwan Strait signal a potential conflict with Taiwan, which could draw in the US and disrupt global supply chains, particularly for semiconductor chips. This has implications for US and global security.

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Banking and Lending Environment

German firms are struggling to secure loans due to economic uncertainty and banks' hesitancy. This limits business investments and job creation, impacting economic growth. However, there is anticipation that the European Central Bank's monetary policy decisions could improve lending conditions and stimulate economic activity.

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Global Manufacturing Woes

The global manufacturing industry is weakening, with major regions like the US, Eurozone, Japan, and China experiencing declining activity. This is causing supply chain problems and delays, especially in the Eurozone, while countries like the UK and India are showing modest growth.

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US Election Uncertainty

The upcoming US presidential election creates uncertainty for businesses, with potential policy changes affecting investment plans. Tariff threats and promises impact business strategies, while the outcome will shape economic policies and global trade.

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Western Military Aid Uncertainty

The future of Western military aid to Ukraine is uncertain due to the upcoming US presidential election. Both candidates have been vague on their Ukraine policies, with Republican candidate Donald Trump expressing skepticism about further support.

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Automotive Industry Crisis

The automotive industry, a key sector for Germany, is facing significant challenges. Volkswagen, a major manufacturer, plans to shut down factories and cut jobs due to weak sales and competition from Chinese manufacturers in the electric vehicle (EV) market. German carmakers are also facing pressure from Donald Trump's trade policies, threatening tariffs on vehicles not produced in the US, and the potential loss of subsidies for EVs.

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US-China Relations

The US has imposed sanctions on Chinese entities for their role in supplying Russia with weapons technology, but China denies providing weapons and claims to handle exports in accordance with laws. Growing trade ties between China and Russia indicate their efforts to circumvent sanctions, and the US is responding with further sanctions and other tools.

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Cybersecurity Threats

The UK faces a surge in ransomware attacks, with data breaches reaching record highs. However, the number of incidents investigated by the Information Commissioner's Office (ICO) has dwindled, raising questions about its capacity to address the issue. The British government has pledged to introduce a Cyber Security and Resilience Bill to expand existing laws and increase mandatory incident reporting.

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Challenges in the Stock Market

Japan's stock market has been characterized by the proliferation of 'punycorns', startups that go public prematurely and fail to achieve significant growth. This trend is attributed to the absence of a vibrant VC ecosystem and the stagnation of parts of Japan's corporate world, making it challenging for startups to secure later-round funding and achieve unicorn status.

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Thailand's International Trade Relations

Thailand is seeking the renewal of tariff benefits under the Generalized System of Preferences (GSP) from the US. Thailand's Commerce Minister emphasized the country's potential as a manufacturing base in the supply chain for key US industries, including digital, AI, electronics, and semiconductors. Thailand also invited US investment in its food industry, highlighting its strength in food security and export potential to emerging markets.

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Israel's Interceptor Missile Shortage

Israel faces a shortage of interceptor missiles, crucial for defence against enemy attacks, particularly from Iran. This has led to concerns about the country's ability to withstand potential retaliation from Iran and rocket fire from Hezbollah. The US, Israel's primary supplier of weapons, may struggle to maintain current supply levels due to commitments to Ukraine.

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US-India Relations

The US presidential election outcome will impact India's exports, investments, and economic growth. A Trump victory could hurt India's exports with his tariff-focused trade policies and immigration stance. Kamala Harris is likely to continue Biden's trade policies, which could be positive for India. The US-India relationship is crucial, with the US investing heavily in India's technology, infrastructure, and renewable energy sectors.

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US-China Relations

The US-China relationship has a significant impact on Germany's economy. Tensions between the two countries and China's economic struggles affect Germany's trade and investments. The outcome of the US presidential election will be crucial for the German equity market, and China's real estate crisis and overproduction impact global stock markets.

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Thailand's Energy Transition

Thailand is exploring hydrogen underground injection with Mitsubishi Power to contribute to a greener environment and enhance technology. This supports Thailand's goal of carbon neutrality by 2050 and net-zero emissions by 2065. However, underground hydrogen storage presents risks, including the possibility of explosions due to hydrogen's flammability. The project also requires costly infrastructure, and Thailand may face serious economic repercussions if it fails.

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Structural Reforms Needed

Germany's economic woes are attributed to internal structures, red tape, and underinvestment in infrastructure. Experts call for structural reforms and investment in public infrastructure to boost the economy.

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US Presidential Election

The close race between Donald Trump and Kamala Harris is impacting markets, with Trump's potential victory seen as inflationary and detrimental to global trade. The election outcome will shape economic policies and international relations, affecting investment strategies and business operations.

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Global Manufacturing Industry Weakness

The global manufacturing industry is showing signs of decline, with the US, Eurozone, Japan, China, and South Korea experiencing decreasing activity. The US manufacturing PMI fell to 47.3 in September, indicating a moderate decline in output, new orders, and employment. Companies are facing supply chain problems, delays, and shortages.

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RegTech Industry

The UK's RegTech industry is expected to grow by 24.9% annually, reaching US$657.84 million in 2024. This growth is driven by technological advancements, regulatory pressures, and the need for efficient compliance solutions, with a focus on anti-money laundering and identity verification.

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Economic Growth Forecast Slashed

The International Monetary Fund (IMF) has cut Japan's 2024 economic growth forecast to 0.3%, the lowest since the pandemic, citing negative developments such as auto supply disruptions and the fading of one-off factors like the sharp rise in tourism in 2023. This cut is relatively larger than other major economies, and Japan's growth is expected to accelerate to 1.1% in 2025.

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US-China Competition

The US and China are engaged in a multidimensional competition, with economic growth, military aspects, and supply chain disruptions as key dimensions. China's lead in battery technology and production, and its super deduction for R&D impact the US's ability to compete.

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Military Spending and Economic Concerns

Israel's war against Hamas and Hezbollah has led to soaring military spending, with monthly expenses rising from $1.8 billion to $4.7 billion. This has caused economic concerns, with economists warning of declining investment, higher taxes, and a strained labor supply. The conflict has also impacted the West Bank economy and Gaza, with high unemployment and displacement.

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Geoeconomic Fragmentation

Geoeconomic fragmentation is altering trade patterns and financial vulnerabilities in the ASEAN+3 and euro area regions. Amidst rising geopolitical tensions, countries are adopting inward-focused strategies to enhance economic and national security. This has impacted China's export activities and increased financial exposure for the euro area. Regional financing mechanisms must adapt to support member countries in navigating these complexities and fostering stability.

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Resilience of Ukraine's Seaborne Trade

Despite intensified rocket attacks on civilian ships and ports, Ukraine's seaborne trade remains resilient. Companies like Maersk and Hapag-Lloyd have resumed or continued operations, signaling a bold move to enhance efficiency and interaction with the Ukrainian market. This comes with increased risks and costs, including high insurance premiums and concerns about the safety of vessels in Ukrainian waters.

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Economic Growth Forecast Cut

The International Monetary Fund (IMF) slashed Japan's 2024 growth forecast to 0.3%, the lowest since the pandemic, citing negative developments such as auto supply disruptions and the fading of one-off factors like a sharp rise in tourism in 2023. This cut in growth forecast is a cause for concern for investors and businesses operating in Japan.

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Western Military Aid to Ukraine

Ukraine has received military aid, including weapons and fighter jets, from Western countries to support its defense against Russia. However, experts warn that many of these weapons may not survive the war if used to their maximum potential. The West needs to be prepared for potential losses while understanding that the support is crucial for Ukraine's victory.

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Biometric Screening in Gaza

Israel is considering a plan to implement biometric screenings for Palestinians in Gaza to receive aid, raising concerns about privacy and surveillance.

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Economic Growth Forecast

The International Monetary Fund (IMF) slashed Japan's 2024 growth forecast to 0.3%, the lowest since the pandemic, citing auto supply disruptions and the fading of one-off factors like tourism. However, the IMF predicts Japan's growth will accelerate to 1.1% in 2025, driven by wage and consumption increases.

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India-Canada Diplomatic Tensions

India-Canada diplomatic ties have hit a low due to accusations by Canadian officials of Indian government agents' involvement in murder and extortion. While no economic retaliation has been imposed yet, experts warn of potential negative consequences for economic growth. Bilateral trade is worth billions, and the rift raises concerns over trade and immigration ties, with businesspeople from both countries possibly seeking opportunities elsewhere. Visa restrictions and delays in immigration processing are also areas of worry.

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US-China Battery Race

The US battery industry lags behind China, which controls the supply chain for lithium-ion batteries. The US needs to invest in next-generation solid-state battery technology to secure its competitiveness and reduce dependence on Chinese graphite.

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Economic Slowdown and Mismanagement

China's economy is facing a slowdown due to falling prices, high local-government debt, declining business and consumer confidence, and a struggling property market. Beijing's stimulus efforts, including monetary easing, government spending, and investment incentives, have been criticized as insufficient and lacking detail, with analysts predicting a continued slump in the property sector and potential global recession.

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Impact of Sanctions on Russia-China Relations

US and UK sanctions on Chinese and Russian entities involved in supplying weapons technology to Russia are impacting Russia-China trade and investment projects. While China denies providing weapons, the sanctioned transactions contradict their statements. The sanctions target entities involved in developing and shipping attack drones, as well as Russia's 'shadow fleet' of oil tankers, aiming to disrupt their military-industrial base.

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Consumer Confidence and Spending

China is facing low consumer confidence and a decrease in spending, exacerbated by the COVID-19 pandemic and changing consumer tastes. This is impacting economic growth, and stimulus measures may not be enough to encourage higher consumption.

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Property Market Crisis

China's property market is facing a crisis, with a burst property bubble and falling real estate prices. The government has responded with stimulus measures, such as quicker credit for developers and support for renovations, but analysts argue that these measures are insufficient to address the market's structural challenges.

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China's Economic Slowdown

China's economy is facing a slowdown, with a struggling property market, falling prices, high local government debt, and declining business and consumer confidence. Beijing has implemented stimulus measures, such as lower interest rates and investment incentives, but analysts are skeptical of their effectiveness in addressing the country's structural issues.

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Economic Downturn

Germany's economy is facing a challenging period with a potential recession looming, lagging behind other advanced economies in terms of GDP growth. Structural issues, such as dependence on Chinese trade and energy prices, contribute to the downturn.