Return to Homepage
Image

Mission Grey Daily Brief - October 11, 2024

Summary of the Global Situation for Businesses and Investors

The global situation remains volatile, with rising tensions in the Middle East and Eastern Europe threatening global energy supplies and regional stability. Oil prices have soared 9% since Iran's missile attack on Israel on October 1, with 30% of the global oil supply coming from the Middle East. Western sanctions on Russia have disrupted the diamond trade in India, leading to job losses and financial hardship. In North Korea, the government has announced plans to permanently seal its border with South Korea, escalating tensions on the Korean peninsula. These developments have raised concerns about the impact on the global economy, trade, and consumer spending.

Escalating Tensions in the Middle East

The Middle East is witnessing heightened tensions with Israel and Iran at the forefront. Iran's missile attack on Israel on October 1 has increased the prospect of an all-out war, threatening global energy supplies and regional stability. Richard Doornbosch, President of the Central Bank of Curaçao and Sint Maarten (CBCS), warned that the escalating situation could have far-reaching consequences for the global economy, particularly in relation to oil prices. Experts caution that a full-scale conflict between Israel and Iran could upend the international energy supply and send shockwaves throughout the global economy.

Western Sanctions on Russia and the Diamond Trade in India

Western sanctions on Russia have disrupted the diamond trade in India, particularly in the city of Surat, which has long been a global hub for diamond polishing. The European Union and G7 have banned Russian diamonds, severely impacting the supply of rough diamonds to India's industry. This has led to job losses and financial hardship for thousands of workers in Surat, with factories shutting down or reducing their workforce. The sanctions have wiped out nearly one-third of India's diamond trade revenue, plunging families into financial hardship.

North Korea's Border Closure with South Korea

North Korea has announced plans to permanently seal its border with South Korea, escalating tensions on the Korean peninsula. The North Korean government has stated that the border closure is a self-defensive measure to inhibit war and defend its security. However, analysts remain uncertain about the impact on relations with South Korea, given that travel and exchanges across the border have been suspended for years. The South Korean government has vowed to punish any provocation from the North, further escalating tensions in the region.

The Impact of Middle East Tensions on Global Energy Supplies

The Middle East is a critical hub for global oil supplies, with around 30% of the world's oil supply coming from the region. Escalating tensions between Israel and Iran have raised concerns about the potential disruption to oil and gas exports, which could have a significant impact on the global economy. Experts warn that a full-scale conflict between Israel and Iran could upend the international energy supply and send shockwaves throughout the global economy. Farzan Sabet, senior research associate at the Geneva Graduate Institute, emphasizes that a "major disruption of regional oil and gas exports is likely to have a material impact on the global economy."

Iran has threatened to block the Strait of Hormuz, a strategic waterway through which a fifth of the world's oil supply flows. Neil Quilliam, an energy policy and geopolitics expert at Chatham House, underscores the importance of the Strait of Hormuz to the global economy. Qatar, one of the world's biggest producers of natural gas, also relies on the Strait of Hormuz for its exports.

Sabet predicts that a major disruption to the flow of oil and gas from the Middle East would have an "outsized effect" on the Chinese economy, as Beijing imports an estimated 1.5 million barrels of oil a day from Iran, accounting for 15% of its oil imports from the region. Increased energy prices for China would "filter through the supply chain to the manufactured goods the country exports to the United States, Europe, and other regions."

Sabet believes that even a major disruption to the flow of oil and gas from the Middle East would not cause the global economy to spiral out of control, largely due to the rise of the United States as a major oil and gas supplier and the decreasing global reliance on fossil fuels. However, Western consumers would "feel the price hike at the pump", although it would be "much less than it might have been in a previous era."


Further Reading:

Central Bank President expresses concerns over Middle East Turmoil - Curacao Chronicle

Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology - europeansting.com - The European Sting

Gulf Powers, Iran, and Turkey Continue to Destabilize Iraq, Libya, Sudan, Syria, and Yemen (Islamic Facade) - Modern Tokyo Times

Israel, as It Once Did in Iraq, Could Give the World a ‘Gift’ by Destroying Iran’s Nuclear Program - The New York Sun

North Korea says it will permanently ‘shut off’ border with South - The Independent

Oil Prices Continue to Climb Amidst Israel-Iran Saber-Rattling - OilPrice.com

The Ukraine War is Driving a Wave of Suicides in India’s Surat - Inkstick

Themes around the World:

Flag

US Economic Performance

The US economy is strong, with positive indicators in equity markets, retail sales, and job creation. However, inflation remains a key concern for voters, and experts warn that Trump's proposed tariffs could lead to higher prices and impact geopolitics.

Flag

Healthcare Reforms and EU Alignment

Ukraine's healthcare system is under immense strain due to frequent attacks on its infrastructure. However, the country remains committed to healthcare reforms and is using the crisis as an opportunity to align its health sector with EU rules in preparation for future EU accession talks. This includes harmonizing policies and regulations in areas such as drug manufacturing, water quality, and patient movement.

Flag

Automotive Industry Struggles

German carmakers like Volkswagen, BMW, and Mercedes-Benz face challenges due to pressure from the US to increase production there, potentially impacting their supply chains and profitability. They also struggle with weak sales, slow expansion in the electric vehicle (EV) sector, and competition from Chinese manufacturers.

Flag

Retaliation Against Iran

After Iran fired ballistic missiles at Israel on October 1, Israel is planning a 'significant retaliation'. While analysts speculate about a potential attack on Iran's oil production, the likelihood is fairly low due to logistical challenges and potential backlash from other countries. Israel's public messaging suggests a strong response, but their actual retaliation will likely be more restrained, targeting Iran's military sites instead.

Flag

International Arms Trade with Israel

A German ship carrying explosives intended for Israel docked in Egypt after being rejected by several countries, amid human rights concerns. Meanwhile, Barclays sold its shares in Israel's largest weapons company, Elbit Systems, due to pro-Palestinian pressure.

Flag

Military Equipment Shortage

Ukraine's Western partners have supplied fighter jets and tanks in small numbers, and Ukraine is unable to acquire certain desired equipment, such as Sweden's Gripen jets, which are better suited to the conflict than the US-made F-16s. Ukraine is also facing challenges in its domestic weaponry manufacturing due to a lack of funding.

Flag

Challenges in Accessing Finance

German firms are facing challenges in securing loans due to economic uncertainty and hesitancy from banks, impacting business investments and job creation. This is particularly difficult for smaller companies, with larger firms like Volkswagen and BMW opting to increase investments abroad.

Flag

US-led Indo-Pacific Economic Framework

Thailand is a member of the US-led Indo-Pacific Economic Framework (IPEF), a 2022 initiative to deepen economic relations among Indo-Pacific nations. IPEF negotiations have been smooth for three pillars, but Pillar I (Trade) may not conclude before the 2024 US elections. Thailand seeks to strengthen its supply chain and benefit from IPEF's focus on resilience and inclusiveness.

Flag

Cybersecurity Threats

Japan is facing cyberattacks from Russian-linked hacking groups, targeting government agencies, logistics, and manufacturing firms. These attacks are believed to be attempts to pressure Japan's government due to its support for Ukraine and its increasing military cooperation with the US. The impact of these cyberattacks on critical infrastructure and businesses highlights the growing importance of cybersecurity.

Flag

Intellectual Property Theft

China has been accused of intellectual property theft, estimated at $600 billion annually from the US alone. This has contributed to China's economic dominance and exploitation of global markets, often disregarding human rights and property protections.

Flag

Property Market Crisis

China's property market is facing significant challenges, 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 more needs to be done to address the market's structural issues and prevent a potential global recession.

Flag

Military Buildup and Geopolitical Tensions

Japan is in the midst of its largest military buildup since World War II, with a $320 billion plan to acquire long-range missiles that can target China, North Korea, and Russia. This shift in policy has led to increased geopolitical tensions, especially with Russia, which has resulted in cyberattacks on Japanese government and industrial targets by Russian-linked hacking groups.

Flag

Semiconductor Industry

Japan is a pivotal player in the global semiconductor industry, with the government allocating 2 trillion yen to boost its chip industry. Prime Minister Fumio Kishida has expressed support for the industry, and international partnerships are bolstering the prospects of Japanese semiconductor firms. The industry is projected to grow 2.3 times over the next decade, driven by advancements in AI, robotics, and automobiles.

Flag

Controversial Sale of Sanofi's Opella

The sale of a 50% stake in Sanofi's consumer health unit, Opella, to a US private equity firm has sparked controversy in France. While the French government has secured guarantees for production and jobs to remain in the country, there are concerns about potential job losses and the loss of control to a foreign company. The deal is valued at €16 billion and includes penalties of over €100 million if Opella stops production in certain factories or breaks agreements with French suppliers. The sale has also led to strikes by workers at Opella's factories.

Flag

Energy Security

Ukraine is facing challenges in keeping the lights on as Russian energy attacks intensify. The country is rebuilding power plants and looking to transition to renewable energy sources, which are harder to destroy and can be repaired more quickly. Ukraine aims for 27% of its final energy consumption to come from renewables by 2030.

Flag

Reshoring Medicine Production

The French government is promoting strategic objectives of reshoring medicine production and keeping manufacturing jobs in the country. This is evident in the sale of Sanofi's Opella to a US investment fund, where the government secured guarantees for production and jobs to remain in France. The government is also taking steps to invest in domestic pharmaceutical production, as seen during the COVID-19 pandemic, to ensure the availability of critical medicines and boost local manufacturing.

Flag

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.

Flag

Wage Hike Pressures

Prime Minister Shigeru Ishiba's pledge to significantly raise Japan's national average wage aims to counter rising food and energy costs due to inflation and a weak yen. However, this move has faced criticism from small businesses, who fear it may hurt their operations and lead to bankruptcies, especially in regional economies.

Flag

Food Security and Climate Nexus

Environmental, economic, and political shocks have led to food insecurity for over 250 million people globally. Climate change, conflict, and supply chain issues impact food availability and access. Food security is a growing concern, with China investing in agriculture to assert leadership, especially in the Global South. US leadership is essential to strengthen partnerships and address food security challenges.

Flag

India-Canada Diplomatic Rift

The recent diplomatic rift between India and Canada over accusations of Indian government agents' involvement in murder and extortion has raised concerns about the impact on bilateral trade and immigration ties. While no economic retaliation has been imposed yet, experts warn of potential disruptions to economic growth, with businesspeople from both countries possibly seeking opportunities elsewhere.

Flag

Automotive Industry Challenges

The automotive industry in France and Europe is facing setbacks with a wave of plant closures and a sharp drop in electric vehicle sales. This has sparked strikes and concerns about job losses. The push for electrification and emissions reduction targets by 2030 is seen as a challenge by some political groups.

Flag

Economic Slowdown and Recession

Germany is facing a prolonged economic slowdown and a second consecutive year of recession, with a predicted 0.2% decline in GDP for 2024. High inflation, interest rates, and weak export demand, along with structural issues like an aging population and bureaucratic inefficiencies, contribute to this downturn.

Flag

Property Market Crisis

China's property market is in crisis, with falling prices, stalled growth, and developers collapsing. The government has responded with stimulus measures, including a 'whitelist' of projects eligible for financing, but these efforts have not fully restored confidence among investors and analysts.

Flag

Food Security Concerns

Environmental, economic, and political shocks have led to global food insecurity, impacting availability, access, utilization, and stability. China is capitalizing on its agricultural advancements to forge partnerships, posing a challenge to US leadership in the Global South and risking a fracture in the global food system.

Flag

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.

Flag

US Election Impact

The upcoming US election influences businesses and markets, with uncertainty causing companies to postpone investments. A potential Trump victory is seen as inflationary, affecting global trade and interest rates, while a Harris win is expected to have a lesser economic impact.

Flag

US-Israel Relations

The US has threatened to cut military aid to Israel if it does not improve the humanitarian situation in Gaza within 30 days. This warning is a significant step up in pressure and puts US military aid in jeopardy. The US is Israel's largest supplier of arms, and any reduction in support could impact Israel's military capabilities and ongoing conflicts.

Flag

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.

Flag

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.

Flag

Aviation Industry Struggles

The German electric aircraft manufacturer Lilium N.V. is facing challenges with its German subsidiaries due to the failure to secure a government-backed loan. This has led to insolvency proceedings, impacting stakeholders and potentially disrupting future investments. The company's international competitors are receiving grants and loans from their respective governments, creating a difficult environment for Lilium to retain market confidence.

Flag

Trade Agreement Strategies

India is adopting a more cautious approach to trade negotiations after FTAs with UAE and ASEAN resulted in higher imports than exports. India is pausing talks with smaller countries and shifting focus to larger markets like the EU and UK, as well as countries of geopolitical importance. The new Standard Operating Procedure aims to streamline trade negotiations and address concerns about investment outflows and errors in previous agreements.

Flag

Interest Rate Hikes

The Bank of Japan (BOJ) has signaled its intention to raise interest rates, citing reduced risks from overseas economies like the US. This comes after nearly two decades of unorthodox monetary easing. The yen's weakness against the US dollar has increased import costs for Japanese households, and further depreciation is a concern.

Flag

Interest Rate Hikes

The Bank of Japan (BOJ) has signaled its intention to raise interest rates, moving away from a decade of unorthodox monetary easing. This is due to decreasing risks from overseas economies, particularly the US, and the emergence of inflation. However, the complicated political situation and the upcoming US presidential election may influence the timing of these rate hikes.

Flag

Russian Hacking Campaign

Russia's hacking campaign against Georgia's government, companies, and infrastructure aims to thwart its westward path and pro-Western aspirations. This includes infiltrating key ministries, the energy sector, and telecommunications networks, with potential sabotage and intervention in domestic politics.

Flag

Economic Impact of Geopolitical Tensions

The conflict between Israel and Iran, coupled with the Israel-Palestine tensions, has led to a volatile moment for oil markets, causing price increases. This affects not only the cost of oil but also the broader economy, including capital flows, jobs, imports, and exports. The situation has also disrupted global trade routes, with international shipping companies avoiding certain areas due to security concerns.

Flag

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.