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Mission Grey Daily Brief - October 13, 2024

Summary of the Global Situation for Businesses and Investors

The Middle East remains a volatile region, with rising tensions between Israel and Iran and the ongoing conflict in Gaza spilling over into Lebanon. The Gaza Health Ministry reported 200 killed in the Israeli siege of the north. The US has imposed fresh sanctions on Iran's oil and petrochemicals sectors, targeting entities involved in shipments of Iranian petroleum and petrochemical products. Saudi Arabia could flood the market with oil, creating a difficult situation for Russia, which is reliant on higher crude prices. Heightened tensions in the Middle East are hindering Türkiye's efforts to revive its economy, with analysts warning of potential shockwaves in global markets. North Korea has accused South Korea of sending drones to its capital, threatening to respond with force. Russia has suffered another setback in Ukraine, losing a Su-34 combat aircraft to a Ukrainian-operated F-16. Ukrainian President Volodymyr Zelenskyy has expressed hope that the war with Russia will end next year, but new clashes were reported on Saturday. A dispute over protection money led to the Myanmar Navy opening fire on Bangladeshi fishing boats, resulting in the death of a Bangladeshi fisherman and the arrest of 58 others. Tensions over the Falklands have escalated, with Argentina accusing the UK of acting in an "illegal" and "aggressive" manner and demanding the return of the islands. China has threatened Taiwan with further trade measures, studying options in response to a speech by Taiwan's president Lai Ching-Te.

Middle East Tensions and the Impact on Global Markets

The Middle East remains a volatile region, with rising tensions between Israel and Iran and the ongoing conflict in Gaza spilling over into Lebanon. The Gaza Health Ministry reported 200 killed in the Israeli siege of the north. The US has imposed fresh sanctions on Iran's oil and petrochemicals sectors, targeting entities involved in shipments of Iranian petroleum and petrochemical products. These sanctions are part of a broader US response to Iran's missile attack on Israel, which included the assassination of Hassan Nasrallah, leader of the Iran-backed militant group Hezbollah. The Biden administration has also imposed sanctions on Iran's petroleum industry, targeting the "shadow fleet" of tankers and illicit operators that help transport Iranian petroleum exports in violation of existing sanctions.

Saudi Arabia could flood the market with oil, creating a difficult situation for Russia, which is reliant on higher crude prices. The kingdom has signaled that crude could drop as low as $50 a barrel if the Organization of Petroleum Exporting Countries (OPEC) does not commit to reducing oil output. This move would slash prices and penalize OPEC members who have not cooperated in reducing oil flows, including Russia. Russia's wartime economy is heavily dependent on oil revenue, and a low-price environment could impact its ability to finance its aggression in Ukraine. Saudi Arabia, the de facto leader of OPEC, has been trying to keep oil above $100 per barrel by pushing for member states to cut production. However, with international crude hovering below the $80 mark, this strategy has not been successful. Riyadh now plans to turn on its taps by December, potentially reigniting an oil price war between Russia and the kingdom.

Heightened tensions in the Middle East are hindering Türkiye's efforts to revive its economy, with analysts warning of potential shockwaves in global markets. Türkiye, a regional power, is vulnerable to the ongoing crisis due to its geographical proximity, political ties, and economic interdependence with countries in the Middle East. The conflict in the region could disrupt energy supplies, leading to higher costs and inflation, and prolonged tensions could also disrupt trade routes, hurting exports and imports and affecting Turkish industries. Over the past five years, Türkiye has been battling significant economic woes, including runaway inflation, a weakened national currency, and a significant current account deficit. While Türkiye has made some progress in addressing these challenges, geopolitical risks could compound its existing economic challenges, potentially leading to a deeper economic slowdown.

North Korea Accuses South Korea of Drone Incursion

North Korea has accused South Korea of sending drones to its capital, threatening to respond with force. This accusation comes amid heightened tensions between the two countries, with North Korea claiming that South Korea violated its airspace. South Korea has denied the allegations, stating that it has not sent any drones to North Korea. The incident has raised concerns about a potential escalation in tensions and the possibility of a military response from North Korea.

Russia's Losses in Ukraine and the Impact on the War

Russia has suffered another setback in Ukraine, losing a Su-34 combat aircraft to a Ukrainian-operated F-16. This incident marks the first air-to-air kill involving a Ukrainian-operated F-16 and underscores the increasing effectiveness of Ukrainian forces in countering Russian air operations. The Su-34 is a crucial asset for Russian air operations, and its significant losses during the conflict have outpaced production. This setback could push Russia to the brink, as combat losses are outpacing production.

Ukrainian President Volodymyr Zelenskyy has expressed hope that the war with Russia will end next year, but new clashes were reported on Saturday. Ukrainian forces targeted a fuel depot in the Russian-occupied Luhansk region, causing a fire. Russia has responded with territorial gains, capturing two frontline villages in eastern Ukraine. The war in Ukraine has taken a toll on media personnel, with Ukraine announcing an investigation into the death of a Ukrainian journalist who was captured and detained by Russia while reporting on Russian-occupied areas in 2023.

Myanmar-Bangladesh Fishing Dispute and the Impact on Regional Relations

A dispute over protection money led to the Myanmar Navy opening fire on Bangladeshi fishing boats, resulting in the death of a Bangladeshi fisherman and the arrest of 58 others. The incident has raised tensions between the two countries, with Bangladesh expressing profound concern over the tragic incident and urging Myanmar to refrain from further provocations. The dispute highlights the complex dynamics of maritime security and the challenges of managing fishing rights and territorial waters in the region.

China-Taiwan Trade Tensions and the Impact on Cross-Strait Relations

China has threatened Taiwan with further trade measures, studying options in response to a speech by Taiwan's president Lai Ching-Te. China views Taiwan as its own territory and considers Lai's speech to be separatist. Lai and his government reject Beijing's sovereignty claims, asserting that only Taiwan's people can decide their future. The Cross-Strait Economic Cooperation Framework Agreement (ECFA) between China and Taiwan, signed in 2010, has been a source of tension, with Taiwanese officials previously suggesting that China could pressure Lai by ending some of the preferential trading terms within it.

China's Taiwan Affairs Office has responded to Lai's speech, accusing him of promoting "separatist ideas" and inciting confrontation. The office has stated that the fundamental reason behind the trade dispute is the "DPP authorities' stubborn adherence to the stance of 'Taiwan independence'". In May, China reinstated tariffs on 134 items it imports from Taiwan, after Beijing's finance ministry suspended concessions on the items under a trade deal because Taiwan had not reciprocated. The trade dispute has the potential to escalate further, with China studying additional measures based on the conclusions of an investigation into trade barriers from Taiwan.


Further Reading:

A dispute over protection money leads to the Myanmar Navy opening fire on Bangladeshi fishing boats and making arrests - Narinjara News

Biden administration imposes fresh sanctions on Iran over missile attack on Israel - USA TODAY

Britain accused of acting in 'illegal' and 'aggressive' manner over Falkland Islands - Manchester Evening News

China threatens Taiwan with more trade measures after denouncing president's speech - CNBC

How Saudi Arabia could create a crisis for Russia's economy - Business Insider

Israel-Iran: A strike on oil assets could revive inflation - DW (English)

Live updates: Joe Biden says Israel should stop strikes on U.N. peacekeepers in Lebanon - NBC News

News Analysis: Mideast tensions to negatively impact Turkish economy - Xinhua

North Korea accuses South Korea of sending drones to capital, threatens to respond with force next time - ABC News

Russia Can't Hide the Fact Its Air Force Is Taking Heavy Losses in Ukraine - The National Interest Online

UPDATES: Gaza Health Ministry says 200 killed in Israeli siege of north - Al Jazeera English

US expands sanctions against Iran's oil industry after attack on Israel - VOA Asia

Ukraine's President expresses hope for an end to the war - Vatican News

Themes around the World:

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US-China Economic Relations

The US and China are reassessing their economic linkages, with the US concerned about intellectual property theft and the impact of China's renewable energy dominance. This has implications for global businesses, particularly in industries with security concerns, such as semiconductor manufacturing.

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Global Manufacturing Decline

The global manufacturing industry is weakening, with declining activity in the US, Eurozone, Japan, China, and South Korea. This decline affects output, new orders, employment, and supply chains, causing businesses to pause spending and investments.

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Sanctions on Russia

The UK has imposed sweeping sanctions on Russia's shadow fleet of oil tankers, targeting 43 vessels to date. This action is part of coordinated efforts with the US, Canada, and European nations to cripple Russia's ability to sustain its war efforts through illicit oil exports, posing a threat to international trade and maritime safety.

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Digital Services Tax Hike

France's proposed increase in the Digital Services Tax (DST) from 3% to 5% could damage its economy, inflame trade tensions with the US, and hinder international tax negotiations. It may particularly affect small and medium-sized businesses and digital trade, and provoke retaliatory tariffs from the US.

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Foreign Investment

Thailand has seen a surge in foreign investment, with companies like Amazon, Google, Microsoft, and Nvidia investing billions in data centers and electronics manufacturing. The Thailand Board of Investment (BOI) approved $2 billion in new investments in November 2024, and investment pledges increased by 42% in the first three quarters of 2024 compared to 2023.

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Sanofi-Opella Sale to US Firm

The French government has approved the sale of a controlling stake in Sanofi's consumer healthcare arm, Opella, to a US private equity firm, CD&R, for €16 billion. This deal has sparked controversy due to concerns about potential job losses and the loss of control to a foreign company. However, the French government has negotiated sanctions and guarantees to ensure production and jobs remain in France, with Opella facing penalties of over €100 million if it fails to uphold these commitments.

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US Tariffs and Trade

US firms are bracing for potential tariffs as the election approaches, with Republican candidate Donald Trump proposing new tariffs on imports and Chinese goods. These tariffs may lead to higher prices for consumers and impact various industries. The impact of tariffs on inflation and US relations with allies is uncertain.

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US Election Impact

The upcoming US presidential election creates uncertainty for businesses, with potential changes in tariffs, taxes, and economic policies. Companies are postponing investments and considering moving abroad, anticipating economic turbulence.

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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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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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Battery Technology Race

The US battery industry has fallen behind global leaders, particularly China, which dominates the lithium-ion battery market. US companies are working towards commercializing next-generation solid-state batteries but have focused funding on current-generation technology. To catch up, the US must urgently commercialize new technologies, increase R&D funding, and incentivize production of advanced batteries.

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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.

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Energy Transition

Germany is transitioning to green energy, attracting investments. However, the shift away from cheap Russian energy has impacted its industries, and the country faces energy shortages.

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UK's Regulatory Technology Sector

The UK's regulatory technology (RegTech) sector is expected to grow significantly, driven by technological advancements and increasing regulatory pressures. Organisations are seeking innovative RegTech solutions for compliance and risk management, particularly in the financial sector. The UK RegTech market is projected to reach $19.5 billion by 2026, with a focus on integrating AI, machine learning, and blockchain technologies.

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Economic Growth Forecast Slashed

The International Monetary Fund (IMF) slashed 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 tourism.

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US Inflation and Consumer Prices

Inflation in the US has dropped from its peak but remains a key concern for voters in the upcoming election. While experts give the economy high marks, most Americans feel worse off than four years ago due to high prices and the lingering effects of the pandemic and Russia's invasion of Ukraine. The outcome of the election will impact economic policies and consumer spending.

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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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Western Military Aid

Ukraine has received military aid, including weapons and fighter jets, from Western partners. However, experts warn that many of these weapons may not survive the war if used to their maximum potential. Ukraine's Western partners have provided equipment in small numbers, limiting their effectiveness. The risk of losses is high, but necessary to support Ukraine's war efforts.

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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, as well as a decline in exports, are contributing factors. However, there is optimism for a medium-term recovery, with easing energy shortages and investments in green energy.

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China's Growing Influence

Georgia's new strategic partnership with China marks a shift in foreign policy. While it offers economic opportunities, it raises concerns about its impact on Georgia's EU integration and relations with Western allies. China's stance on the Ukraine war and its pseudo-neutrality are also questioned.

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Economic Stimulus Measures

China has announced fiscal stimulus measures to address its economic slowdown, including monetary easing, government spending, and investment incentives. However, there are doubts about their effectiveness, with some analysts predicting a potential global recession if stronger action isn't taken.

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US-China Trade Tensions

The US and China are engaged in a trade war, with both countries imposing tariffs and sanctions on each other's companies. This has disrupted supply chains and impacted businesses, causing them to reassess their exposure to China. The US has also restricted investment in Chinese tech firms, particularly in advanced technologies such as AI and quantum computing.

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Aging Population

The aging populations of Japan and China present challenges and opportunities. Japan has made strides in adapting with policies and investments in healthcare, pharmaceuticals, and eldercare services. This has resulted in a robust 'silver economy', with leading companies in healthcare, eldercare, and technology. Japan's success provides opportunities for cooperation and collaboration with China.

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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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Scam Epidemic

Scams are a growing issue in Thailand, with over 1.5 million scam numbers detected and 612,603 online scam cases reported between March 2022 and July 2024, resulting in financial losses. The private and public sectors are collaborating to combat scams, and companies like Gogolook are offering anti-scam solutions to protect consumers and businesses.

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US Military Aid and Pressure

The US, Israel's major ally and biggest supplier of arms, has threatened to cut military support if Israel does not improve humanitarian aid access to Gaza within 30 days. This pressure could jeopardize US military aid to Israel, though similar threats in the past have not stopped the flow of weapons. The US has also agreed to send Israel a missile defense system to deter Iranian ballistic missile attacks.

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Thailand's Economic Transition

Thailand is transitioning its economy towards environmentally sustainable practices. The United Nations estimates an annual investment need of 400-500 billion baht in industries facilitating this transition. The Bank of Thailand (BOT) and the Securities and Exchange Commission (SEC) are implementing a classification system, with activities categorized into green, yellow, and red based on their environmental impact. This provides clarity for investors and has led to the introduction of green financial products such as green bonds and loans.

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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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Political Turmoil and Military Buildup

Japan's parliamentary elections and shift in leadership have caused political uncertainty, potentially impacting the country's market rally. The new government is also pursuing Japan's largest military buildup since World War II, increasing defense spending by 16% amid geopolitical rivalries with China and Russia.

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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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Healthcare sector challenges

France's healthcare sector faces challenges with medication shortages and a reliance on overseas suppliers, exacerbated by the COVID-19 pandemic. The government has provided subsidies to drugmakers to reshore medicine production, particularly for critical medicines like paracetamol. The sale of Sanofi's Opella unit has highlighted the importance of securing supply chains and maintaining control over the production of essential medicines.

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Energy Market Reforms

Proposed reforms to the UK's energy market, including zonal pricing, have sparked debate. While some argue that zonal pricing will reduce costs and encourage investment in renewables, others fear it will lead to higher bills for energy-intensive industries and raise costs for clean energy developers, potentially impacting the UK's climate goals and consumer bills.

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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.

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China's Africa Strategy

China's Belt and Road Initiative activities in Africa focus on infrastructure and resource extraction. Political instability in Africa poses challenges to China's investments and may force a shift from its non-interference policy. African leaders are advised to diversify economic relationships to avoid becoming victims of Chinese neocolonialism.

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Global Manufacturing Decline

The global manufacturing industry is showing signs of decline, with major regions like the US, Eurozone, China, and South Korea experiencing decreasing activity. This decline is reflected in falling output, new orders, and employment rates, causing concerns for businesses and investors.

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US-China Trade Tensions

The ongoing trade tensions between the US and China have led to a shift in global supply chains. India stands to benefit from the 'China Plus One' strategy, attracting manufacturing and sourcing diversification. However, India's high tariffs and FDI restrictions may hinder its ability to fully capitalize on this opportunity.