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Mission Grey Daily Brief - September 14, 2024

Summary of the Global Situation for Businesses and Investors

The global situation remains dynamic, with escalating tensions in the South China Sea, the ongoing war in Ukraine, and the upcoming US elections shaping the landscape. In the South China Sea, China's aggressive actions towards the Philippines have raised concerns among US allies, while Ukraine's surprise incursion into Russia's Kursk region has slowed Moscow's advance. Central Europe braces for severe flooding, and the US Department of Justice alleges that Russia and Iran are attempting to influence the US election. Businesses and investors should remain vigilant as these events unfold, assessing their potential impact and adapting their strategies accordingly.

China's Aggressive Actions in the South China Sea

In recent months, China has escalated its aggressive actions in the South China Sea, particularly towards the Philippines. Chinese coast guards armed with knives and swords attacked Philippine vessels, injuring soldiers and blocking the delivery of supplies to troops stationed in the disputed islands. China has also deployed maritime law enforcement vessels and used non-lethal tactics to carefully avoid triggering a US military response under the Mutual Defense Treaty. These actions have raised concerns among US allies, with the US and Lithuania expressing worry about China's "provocative, destabilizing, and intimidating activities." Businesses operating in the region should be cautious and prepared for potential disruptions as tensions escalate.

Ukraine's Incursion into Russia's Kursk Region

Ukraine's surprise incursion into Russia's Kursk region on August 6 has produced the desired result of slowing Moscow's advance on another front. Ukraine has claimed control over dozens of settlements, and President Volodymyr Zelensky stated that Russia's counterattack has had no major successes. This development comes as Ukraine intensifies its calls on Western allies to allow long-range attacks into Russia, a request that has gained traction with US President Joe Biden and British Prime Minister Keir Starmer. Businesses should monitor the situation closely, as a potential shift in Western policy could have significant implications for the conflict and the region's stability.

Severe Flooding Expected in Central Europe

Central European nations are bracing for severe flooding expected to hit the Czech Republic, Poland, Austria, Germany, Slovakia, and Hungary over the weekend. The low-pressure system from northern Italy is predicted to bring heavy rainfall, and residents have been warned of potential evacuations. Businesses and investors with assets or operations in these regions should prepare for potential disruptions and ensure the safety of their employees and properties.

US Department of Justice Alleges Russian and Iranian Election Interference

The US Department of Justice (DOJ) has stated that it is preparing criminal charges in connection with an alleged Iranian hack on the Trump campaign, suggesting that Russia and Iran are attempting to influence the upcoming US elections. This development underscores the ongoing geopolitical tensions and the potential for further US-Russia friction. Businesses with interests in either country should stay apprised of the situation, as it may impact their operations and investments.

Risks and Opportunities

  • Risk: The escalating tensions in the South China Sea pose risks to businesses operating in the region, particularly those in the Philippines or with close ties to the country. The potential for disruptions to supply chains and operations is heightened, and businesses should consider contingency plans.
  • Risk: The ongoing war in Ukraine and the potential shift in Western policy towards allowing long-range attacks into Russia introduce uncertainty and potential escalation. Businesses should closely monitor the situation and be prepared for rapid changes in the conflict dynamics.
  • Opportunity: The start of commercial crude oil production in Uganda is expected to boost the country's economic growth, surpassing 10% in the next fiscal year. Businesses and investors in the energy sector or with interests in the region may find opportunities for expansion and growth.
  • Opportunity: Central European nations' preparations for severe flooding showcase their proactive approach to climate change-induced challenges. Businesses in the region may find opportunities in resilience-building initiatives and the development of sustainable solutions to mitigate the impact of extreme weather events.

Further Reading:

Biden admin faces mounting pressure to allow Ukraine to strike inside Russia with US missiles - Fox News

Central Europe braces for heavy rains and flooding forecast over the weekend - ABC News

China is taking over the South China Sea, and the US isn't doing enough to stop it, experts say - Business Insider

China’s Destabilizing Moves: US And Lithuania React To South China Sea Tensions - NewsX

Civilian Cargo Ship Carrying Ukrainian Grain Hit By Russian Strike In Black Sea - Radio Free Europe / Radio Liberty

Civilians Killed In Attack In Central Afghanistan - Radio Free Europe / Radio Liberty

Comoros President Slightly Injured in Knife Attack, Spokesperson Says - Asharq Al-awsat - English

Crude oil production will improve Uganda’s economic growth, IMF says - Offshore Technology

DOJ: Russia and Iran attempting to influence U.S. election - MSNBC

Themes around the World:

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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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Automotive Sector Challenges

The automotive sector in France and Europe is facing challenges due to a sharp drop in sales of electric vehicles and increasing competition from China. This has resulted in plant closures and job threats, leading to debates about the pace of electrifying the vehicle fleet and the impact of regulations. There are concerns about the accessibility and affordability of electric vehicles for the working and middle classes, as well as their ability to meet emission reduction targets.

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Property Market Crisis

China's property market is in crisis, with falling prices, stalled projects, and developers collapsing. The government has responded with financial support and policy changes, but these efforts may not be enough to stabilize the market and could have unintended consequences for the economy.

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Political Repression and Economic Risk

Under Xi Jinping, the Chinese Communist Party has become more repressive and assertive. This has resulted in an exodus of businesses due to regulatory risks, reputational risks, and concerns about human rights and property protections.

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Semiconductor Industry Opportunities

Japan has emerged as a pivotal player in the global semiconductor industry, with the government allocating 2 trillion yen to bolster the industry. The country's close ties with the US and affinities with Taiwan and South Korea position it well in the midst of US-China tensions. This presents opportunities for investors and businesses in the semiconductor space.

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US-Russia Relations

The US has added numerous entities to its trade blacklist for allegedly aiding Russia's war effort in Ukraine, restricting their access to US items and technologies. This action is part of the US's vigilance in defending national security and sending a message to malicious actors.

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Ukraine's Drone Warfare

Ukraine's use of drones has been crucial for surveillance, targeting, and strikes, with the country now developing its own military-grade drones. This has implications for the global arms market as Ukraine considers lifting its export ban on drones, and for the future of warfare as American firms adapt to a more self-reliant Ukraine.

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US Manufacturing Decline

The US manufacturing industry is in decline, with the US PMI falling below 50, indicating accelerated activity decline. This is due to reduced spending, investment, and inventory-building amid election uncertainty, though lower interest rates have boosted confidence.

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Economic Growth Strategies

The UK government's new industrial strategy aims to address economic uncertainty and achieve growth. It focuses on infrastructure, clean energy, and AI investments, but Brexit and geopolitical tensions are largely unaddressed, and there are concerns about regional inequality.

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Tech Hub Status

Thailand has become an attractive destination for Big Tech investment, with companies like Google, Amazon, and Microsoft investing millions. The country's Board of Investment (BOI) has approved $2 billion in new investments in electronics manufacturing and data centers, reinforcing its status as a regional tech hub.

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Humanitarian Crisis in Gaza

The ongoing conflict has resulted in a dire humanitarian crisis in Gaza, with reports of food, water, and medical supply shortages, as well as overcrowding and the risk of lethal contagion. The situation has been further exacerbated by Israeli restrictions on humanitarian movements and the potential banning of the UN relief agency, Unrwa, from operating in Israel.

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Stock Market Dynamics

India's stock market is experiencing increased foreign capital outflows due to the 'sell India, buy China' strategy following China's stimulus package. However, experts believe this trend may be short-lived due to China's structural economic challenges and high debt-to-GDP ratio. India remains a stable and predictable investment destination with solid economic fundamentals.

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Digital Supply Chain Security

The UK faces increased cyberattacks from state-sponsored threat actors, particularly Russia and China. These attacks target critical national infrastructure and digital supply chains, posing significant risks to the economy and national security. Securing digital supply chains is a key focus for the UK and NATO allies.

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US-China Competition

Competition with China is a central issue in US politics, with economic growth, military aspects, and supply chain disruptions as key dimensions. China's lead in battery technology and production has put the US at a disadvantage, and US policy aims to boost domestic industries. China's actions towards Taiwan also threaten global economic stability.

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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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US Election Impact

The upcoming US presidential election is causing uncertainty for businesses, with companies postponing or scaling down investment plans. The election outcome will also impact the direction of US tariffs and trade policies, with a potential Trump victory seen as inflationary and affecting global trade.

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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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Economic Growth

The French economy grew by 0.4% in the third quarter of 2024, driven by a 0.5% increase in consumer spending related to the Paris Olympics. However, trade and investment weaknesses persist, with a decline in exports and business investment. The government's planned budget cuts and tax increases for 2025 may further slow growth.

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India's Attractiveness to Foreign Investors

India is attracting increased foreign investment, particularly from the US, due to its skilled workforce, low labor costs, and political stability. US companies are increasingly sourcing apparel from India, and US imports from India have more than doubled in the last decade. India's economic reforms and growing middle class have propelled Indian companies onto the global stage. However, rising labor costs and high logistics costs are challenges that need to be addressed.

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Georgia's EU Aspirations

Georgia's ambition to join the EU is enshrined in its constitution, with polls showing consistent support. However, the recent victory of the anti-Western Georgian Dream party has put these plans on hold, and the country now faces a potential lurch towards authoritarianism and closer ties with Russia.

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US Semiconductor Export Controls

The Biden administration's export controls on semiconductors impact US company revenues and accelerate China's efforts to develop its own technology. This may lead to a shift in semiconductor supply chains away from US reliance, affecting US firm revenues.

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Political Turmoil and Budgetary Challenges

France's political landscape is marked by a hung parliament and fierce budget debates. The new government's plans to tackle the deficit with tax hikes and spending cuts have sparked an outcry from left-wing lawmakers and unions, who argue that these measures will unfairly impact low-income families, apprentices, retirees, and small businesses. The government's survival hangs in the balance.

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Energy Security

India is hungry for energy to meet the demands of its growing population and economy. The country aims to quadruple its natural gas use by 2030, which has raised concerns given the volatility of the gas market. India is also investing in nuclear power, green hydrogen, and electric vehicles for energy independence.

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Foreign Investment Opportunities

Japan is attracting more foreign investment, with the yen's depreciation making Japanese assets more attractive. The country is also easing restrictions for foreign lawyers, creating more opportunities for international law firms, particularly those advising on cross-border deals. This shift in focus from China is due to increasing geopolitical risks.

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High-Speed Train Market Competition

France has opened its high-speed train market to competition, allowing domestic and international operators to offer alternatives to the national carrier, SNCF. This is expected to improve service, accessibility, and affordability for passengers, but there are concerns about the impact on scheduling and pricing transparency.

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Ukraine's Drone Industry

Ukraine's drone industry has become a critical aspect of its military strategy. The country has been developing and producing its own drones, which are more precise and resilient than those provided by Western partners. This self-reliance may impact American firms' demand for their equipment. Ukraine is also considering lifting an export ban on drones to generate revenue for local companies, but this raises concerns about Russian forces obtaining sensitive technology.

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US-India Relations

The US presidential election outcome will significantly impact India, particularly in defence, trade, and strategic sectors. A Trump victory may lead to higher tariffs and immigration restrictions, while a Harris presidency is likely to emphasize economic resilience and reduce reliance on global supply chains. The US is a major investor in India across various sectors.

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Overproduction and Cheap Exports

China's industrial overcapacity has resulted in a flood of cheap exports, creating a sharp backlash in the form of stiff tariffs. This dynamic has destabilized the global market and risks sending China's economy into deflation, as companies compete aggressively on price to service their debt.

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Political Turmoil and Fiscal Reforms

France is facing political turmoil with a hung parliament and fierce budget debates. Divisions following snap legislative elections have delayed much-needed fiscal reforms, and the country is facing a record-high deficit. The economic uncertainty has led to a challenging environment for investors, and there are concerns about the government's ability to implement measures to improve its financial situation. The new Prime Minister, Michel Barnier, aims to bring the public sector deficit below 5% of GDP next year.

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Cybersecurity Threats

The UK faces increased cyberattacks from state-sponsored threat actors, particularly Russia and China, targeting critical national infrastructure and digital supply chains. The new Cyber Security and Resilience Bill aims to address these threats, in line with the UK's commitment to NATO's digital security.

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Energy Transition and Security

The UK is transitioning to low-carbon electricity sources and renewable energy, reducing reliance on fossil fuels. This strategy aims to achieve net-zero emissions by 2050. The risk of winter blackouts is at its lowest in four years, and the UK expects to rely on record levels of imported electricity. However, there are concerns about surging energy bills due to continued gas reliance, highlighting the need for energy efficiency measures.

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EU Investment Surge in China

Despite calls for 'de-risking' economic ties, EU investments in China reached a new quarterly record of US$3.9 billion in Q2 2024, led by German carmakers. This surge is driven by companies' desire to localize production and protect supply chains from geopolitical tensions. However, it also occurs amid rising trade tensions between the EU and China, particularly in the automotive sector.

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Foreign Investment Opportunities

Japan is attracting foreign investment, with a depreciated yen and government initiatives making Japanese assets more attractive. The country is also easing restrictions for foreign lawyers, creating more opportunities for international law firms, especially in cross-border deals.

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Foreign Investment Opportunities

Japan is attracting more foreign investment, with streamlined processes for foreign lawyers, making it easier for international law firms to operate in the country. The depreciation of the yen has also made Japanese assets more attractive, boosting mergers and acquisitions.

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US Economic Exceptionalism

The US dollar, equities, and yields are experiencing gains due to US economic exceptionalism, reduced Federal Reserve easing, and improved polling for Trump. This has resulted in volatile trading, with the US dollar securing consecutive weekly gains and gold reaching an all-time high. A Trump victory is expected to impact global trade and reduce Fed rate cuts.

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Pilot Training

Ukraine faces challenges in training enough pilots to effectively utilize its growing fleet of F-16 fighter jets. Bottlenecks among Ukraine's international partners and limited training spaces have restricted the number of trained pilots, highlighting the need for efficient training programs and coordination with partner countries.