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Mission Grey Daily Brief - October 23, 2024

Summary of the Global Situation for Businesses and Investors

The global situation remains highly volatile, with geopolitical tensions and conflicts continuing to impact the global economy. The tight US presidential race between Republican Donald Trump and Democratic Kamala Harris is causing concern among investors, with a Trump victory expected to heighten geopolitical tensions and negatively impact the global economy. Meanwhile, the BRICS summit hosted by Russia is aimed at building a non-Western global coalition, tightening economic and military ties with China and snubbing Western leaders. The ongoing conflict in Ukraine and the escalating attacks on Ukrainian ports are threatening global food security and impacting agricultural exports. Additionally, reports of North Korea sending troops to aid Russia in the Ukraine war have raised global concerns, with South Korea warning of potential arms shipments to Ukraine.

US Presidential Election and Global Economy

The tight US presidential race between Republican Donald Trump and Democratic Kamala Harris is causing concern among investors, with a Trump victory expected to heighten geopolitical tensions and negatively impact the global economy. Trond Grande, deputy CEO of Norges Bank Investment Management, which operates the $1.8 trillion fund, stated that a Trump victory would exacerbate geopolitical tensions and hurt European companies dealing with Chinese companies. The fund is monitoring the escalating conflict in the Middle East and its potential impact on its holdings in the region.

BRICS Summit and Russia-China Alliance

The BRICS summit hosted by Russia is aimed at building a non-Western global coalition, tightening economic and military ties with China and snubbing Western leaders. Russian President Vladimir Putin defended his invasion of Ukraine and expressed his intention to keep fighting until victory. The BRICS alliance, originally comprised of Brazil, Russia, India, and China, now includes countries that make up 45% of the world's population. Chinese President Xi Jinping expressed his support for the summit and highlighted the alliance's economic and military ties. The US and its Western allies have pressured China to join in condemning Russia's invasion, but China has resisted these efforts.

Ukraine Conflict and Global Food Security

The ongoing conflict in Ukraine and the escalating attacks on Ukrainian ports are threatening global food security and impacting agricultural exports. British Prime Minister Sir Keir Starmer warned that Russia's attacks on Ukrainian ports are delaying the export of agricultural produce, including aid intended for Palestinians caught up in the conflict with Israel. Russian missile strikes have damaged grain silos and port infrastructure, impacting the export of agricultural goods. However, Ukraine has created a maritime corridor to ensure the safety of grain exports, and exported 962,000 tonnes of grain in the first ten days of October. The UK government has announced an extra £2.26 billion in funding for Ukraine, using profits from Russian assets held in Europe.

North Korea's Potential Involvement in Ukraine War

Reports of North Korea sending troops to aid Russia in the Ukraine war have raised global concerns, with South Korea warning of potential arms shipments to Ukraine. South Korean intelligence suggests that Russian ships have transported around 1,500 North Korean troops, who are expected to be deployed to the frontline in Ukraine after training. South Korean media has reported that Pyongyang is readying up to 12,000 troops. The deployment of North Korean troops would mark a major shift in North Korea's foreign relations and pose a significant global risk. Experts on North Korea have expressed concern about the potential use of North Korean troops as cannon fodder and the logistical and cross-cultural challenges of integrating them into Russian forces.


Further Reading:

Albania’s former president Meta is arrested for alleged money laundering, his party says - Toronto Star

Albania’s left-wing former President Meta is arrested on corruption allegations - Toronto Star

Belarus arrests well-known analyst as crackdown on opposition continues - The Messenger

Is Russia behind recent arson attacks in Europe? - Euronews

Italy's Meloni invites Erdoğan for 2025 summit, voices concern over Mideast conflicts - Hurriyet Daily News

North Korea sending troops into Ukraine could supercharge an already-close partnership with Russia - Business Insider

Paul Whelan says he passed information from Ukraine frontlines to US from Russian prison - USA TODAY

Putin tries to build non-Western global coalition at BRICS summit as Ukraine war looms - USA TODAY

Sri Lanka police raise security at popular surf site over threat to Israelis - Voice Of Alexandria

Starmer warns Russia attacks in Ukraine risk global food security - BBC.com

Trump victory would heighten geopolitical tensions, Norway fund official says - KFGO

Themes around the World:

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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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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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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.

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Leadership Transition in Family Businesses

Germany's renowned Mittelstand, comprising mostly family-owned businesses, faces challenges in leadership transition. As patriarchs retire, many struggle to find heirs interested in continuing the business, leading to ownership succession issues. This is further exacerbated by high corporate tax rates, rising energy costs, and bureaucratic complexities.

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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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Digital Services Tax Hike

France is considering increasing its Digital Services Tax (DST) from 3% to 5%, which could negatively impact its economy and trade relations. This move may hinder growth in the professional and business services sector, affecting small and medium-sized businesses that rely on digital trade. Additionally, it could inflame tensions with the US, leading to retaliatory tariffs, and undermine global tax talks, setting a destabilizing precedent for other countries.

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Travel and Tourism Advisory

The UK has issued a travel advisory for 18 countries, including popular tourist destinations, due to escalating regional tensions and security concerns. This could significantly impact the tourism industry in these countries, particularly as the peak winter travel season approaches.

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US Tariffs and Trade Policies

US firms are bracing for potential tariffs as the presidential election approaches. Republican candidate Donald Trump has proposed a universal import tariff, including a 10% tariff on all imports and up to 60% on Chinese goods. These tariffs are expected to increase prices for consumers and impact various industries. The US's trade policies and relations with China, including export controls on semiconductors, are also shaping global dynamics.

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Consumer Confidence Crisis

China is facing a consumer confidence crisis, with low spending and consumption rates. Despite official messaging of optimism, consumers remain cautious, impacting economic growth. The COVID-19 pandemic and lockdowns, as well as the property market crisis, have contributed to this lack of confidence.

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UK's Relationship with Russia

The UK has escalated its sanctions against Russia's covert seaborne oil exports, targeting a 'shadow fleet' of oil tankers. This has been done in coordination with other countries to curtail Russia's ability to bypass sanctions and sustain its war efforts. The UK has also sanctioned LNG vessels and Russia's energy sector, putting pressure on Russia's energy industry and revenue streams.

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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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India-Canada Relations

The recent breakdown in diplomatic relations between India and Canada over accusations of Indian government agents' involvement in a murder in Canada has raised concerns about the impact on bilateral trade and immigration ties. While no economic retaliation has been imposed yet, the uncertainty has led to cautious business expansion and potential delays in immigration processing.

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Foreign Investment Opportunities

Japan is attracting more foreign investment, with investors like Warren Buffett shifting their focus from China due to its economic and geopolitical risks. Japan is easing the path for foreign lawyers, and its depreciating yen makes assets more attractive, boosting mergers and acquisitions. The government has also introduced guidelines urging companies to consider takeover offers, increasing M&A activity.

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Record-High Deficit and Mounting Debt

France's financial future is under scrutiny as credit rating agencies assess the country's ability to manage its debt. The country faces a record-high deficit, projected to reach 6.1% of GDP this year, and a potential downgrade in its credit rating. The government plans to borrow €300 billion in medium- and long-term bonds next year, risking becoming the biggest borrower in the Eurozone.

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Supply Chain Resilience

Thailand is part of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF), which aims to strengthen economic relations and supply chain resilience among member countries. The agreement focuses on identifying vulnerabilities, diversifying sourcing, and establishing rapid response frameworks to mitigate the impact of disruptions. Thailand's role in IPEF enhances its position in global supply chains and promotes economic growth.

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Economic Growth Strategies

The UK government's new industrial strategy aims to steer the economy through global economic uncertainty by focusing on growth, addressing regional inequality, and investing in infrastructure, broadband, and emerging industries like AI and clean energy. However, the plan has been criticized for its limited mention of Brexit and its potential impact on industries reliant on EU supply chains and markets.

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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.

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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.

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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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US Economic Exceptionalism

The US dollar has seen consecutive weekly gains due to economic exceptionalism, improved polling for Trump, and reduced Federal Reserve easing expectations. This has resulted in volatile trading and a positive correlation with US bond volatility.

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Economic recovery post-COVID-19

France's economy is recovering from the impacts of the COVID-19 pandemic, which contributed to its high public debt. President Macron's previous "whatever it takes" strategy included state intervention and massive unemployment programs. The current government aims to reduce the deficit and restore fiscal order, but faces challenges in balancing spending cuts and tax hikes without negatively affecting businesses and families.

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US-China Technology Competition

The US and China are engaged in a technology competition, particularly in the semiconductor and battery industries. China has made significant investments in battery technology and supply chains, while the US focuses on next-generation solid-state batteries. US export controls on semiconductors may push China to 'design out' US technology, impacting US company revenues and supply chains.

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Interceptor Missile Shortage

Israel is facing a shortage of interceptor missiles, crucial for defending against enemy attacks. The threat of escalation with Iran and continued attacks from Hamas, Hezbollah, Houthis, and Iran puts pressure on Israel's missile stockpile. While Israel's air defense systems excel at intercepting missiles, they struggle against drones, as seen in a recent Hezbollah drone strike.

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Book Industry Challenges

The book industry in Japan is facing significant challenges, with a decline in physical bookstores and a decrease in reading habits among the population. A government report identified 34 challenges, including rising logistics costs, cashless transaction fees, and competition from online retailers. The decline in bookstores has implications for Japan's cultural and literary landscape, and the government is seeking feedback to formulate policies to sustain this industry.

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Geopolitical Risk and Supply Chains

China's assertive foreign policy and tensions with the US and its allies pose risks to supply chains. China has used sanctions and supply chain disruptions as a geopolitical tool, as seen in the case of US drone manufacturer Skydio. Businesses are reassessing their supply chains to reduce exposure to China, with some diversifying away from China to Southeast Asian countries.

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US-China Competition

Competition with China is a key theme in US politics, with economic growth, military drills, and technology development at the forefront. China's lead in battery technology and supply chain control is a concern, while US tariffs on Chinese goods impact industries and consumer prices.

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US Economic Performance

The US economy is showing signs of strength, with rising equity benchmarks, strong retail sales, and lower jobless claims. The US dollar has also gained value, and improved polling for a potential Trump victory has boosted volatility in trading and the dollar's value.

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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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RegTech Industry Growth

The UK's RegTech industry is expected to grow by 24.9% annually, reaching US$657.84 million in 2024. Technological advancements and regulatory pressures drive this growth, with organizations seeking innovative solutions for compliance and risk management. The UK RegTech sector has the potential to become a global leader in regulatory innovation.

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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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Aviation Industry Turbulence

Germany's Lilium NV, the parent company of Lilium and Lilium eAircraft, is facing potential insolvency due to limited cash for operations and the German government's decision not to approve a EUR50 million guarantee for a loan.

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Conflict with Iran

Tensions with Iran have escalated due to Iran's ballistic missile attacks and Israel's retaliation. Israel's strikes on Iran's air defense network have increased Iran's vulnerability to future attacks, potentially impacting oil supply and prices globally.

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Thai Stock Market Volatility

Thailand's SET Index fell slightly due to a selloff of New Co stocks. Analysts expect fluctuations to continue. Foreign investors play a significant role in the Thai stock market, impacting liquidity, market sentiment, exchange rates, sectoral impact, regulatory influence, and risk management. Their presence is crucial for the market.

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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.

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Political Uncertainty

Japan's recent parliamentary elections resulted in Prime Minister Shigeru Ishiba's ruling coalition losing its majority, creating political uncertainty. This could impact the Bank of Japan's monetary policies and the country's market rally, which has experienced one of its strongest rallies in decades, with the Nikkei 225 index up nearly 50% since 2023.

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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.