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Mission Grey Daily Brief - October 27, 2024

Summary of the Global Situation for Businesses and Investors

The world is stumbling towards a global conflict as tensions in the Middle East and Ukraine threaten to escalate into a wider war. Israel's attack on Iran has drawn the US into the conflict, and Russia's involvement could lead to a direct confrontation with the US and NATO. North Korea's deployment of troops in Russia has signalled a dangerous new phase in the war, and China's military drills around Taiwan have intensified tensions in the region. Migration from Venezuela has surged after Nicolás Maduro's election victory, and Russia's economy is overheating due to high military spending and sanctions failures. The US election will have ramifications for the global economy, with potential changes to corporate tax rates and global tax reforms.

Middle East Conflict

The Middle East is facing increasing uncertainty as regional tensions rise and the threat of military confrontation between Israel and Iran looms large. Saudi Arabia is hosting a major investment summit, but investor appetite is being tested by the region's instability. Deals worth more than $28 billion are expected to be announced, but the regional conflict is weighing on global investor sentiment. Saudi Arabia's focus on technology and AI is attracting prominent names in the industry, but the country's vast oil wealth has limits and its foreign policy is focused on lowering tensions to attract foreign capital and technological know-how.

US Election

The outcome of the US election will have significant implications for the global economy, particularly for Ireland, which has a trade and investment relationship of more than $1 trillion with the US. Corporatesection Corporatesection If Democrat candidate Kamala Harris wins, she plans to increase the US corporate tax rate to 28%, which would raise government revenue from corporate America but has drawn criticism from US businesses. Republican candidate Donald Trump, on the other hand, proposes cutting the corporate tax rate to 15%, which is the same rate that large US multinationals pay in Ireland. Irish businesses must stay agile and informed about potential changes, as US tax policies and global trade dynamics could shift depending on the election result.

Ukraine-Russia War

The Russo-Ukrainian War continues to rage on, with Russian forces suffering record casualty rates and North Korean troops joining the fight. Ukrainian sappers are facing a daunting task as they race against the world's largest minefield, with 3,000 deminers against 180,000 square kilometers of mine-riddled territory. Ukrainian commandos have halted an ambitious Russian attempt to outflank the strategic town of Lyman, and intercepted 44 of 91 Russian drones in an overnight assault, but their air defense success rate has dropped sharply. The EU and G7 members have reached a consensus on $50 billion in financial assistance to Ukraine, and Germany's Rheinmetall has delivered 20 additional Marder infantry fighting vehicles to Ukraine's Armed Forces, strengthening Kyiv's defense capabilities.

China-Taiwan Tensions

China has strongly condemned the latest $2 billion arms sale approved by the US for Taiwan, declaring it a threat to regional peace and promising decisive counter-measures in response. The arms sale includes advanced missile systems intended to bolster Taiwan's air defenses, and Taiwan's defense ministry has expressed confidence that the Nasams will enhance its ability to protect itself against Chinese military manoeuvres. China has intensified its own presence around the island, with military drills simulating the sealing off of key ports and mobilising a record number of forces. Taiwan has reported as many as 153 Chinese aircraft, along with 14 navy vessels and 12 government ships, taking part in the drills, and Chinese officials have characterised these exercises as preparations to "secure the region".


Further Reading:

China promises ‘counter-measures’ after $2bn US arms sale to Taiwan - The Independent

How could the US election affect business in Ireland? - RTÉ News

How the Israeli Attack on Iran Could Seed a New World War - The Intercept

Iran's president warns against further attacks after Israel airstrikes hit military targets - Sky News

Migration from Venezuela surges after Nicolás Maduro snatches election from opposition - Financial Times

Russia can finance war against Ukraine for several more years despite overheating economy – WP - Ukrainska Pravda

Russo-Ukrainian War, day 975: Russian forces suffer record casualty rates as North Korean troops move towards the frontline - Euromaidan Press

Russo-Ukrainian War, day 976: Russian strikes kill civilians across Ukraine as air defense success rate drops - Euromaidan Press

Wall Street and tech royalty fly to Saudi event amid Mideast war - Fortune

Themes around the World:

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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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Capital Market Activity

India's capital market is seeing increased activity, with 336 companies going public in Samvat 2080, dominated by SMEs. There is a wave of retail enthusiasm for SME IPOs, with many offerings oversubscribed by substantial margins. This has expanded the investor base, with registered demat accounts reaching the 17-crore mark. The IPO mania has also attracted global corporations seeking public listings in India.

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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 accessibility, comfort, and pricing for passengers. New operators, such as Le Train and Proxima, are investing in the market, while international companies like Trenitalia and Renfe have expanded their routes. However, there are concerns about the potential impact on scheduling options and the viability of less profitable lines.

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Use of Private Security Contractors

Israel is considering using private security contractors, possibly including UK special forces veterans, to deliver aid to Gaza. This decision is controversial as aid agencies fear being targeted as combatants if they are part of militarized convoys. The use of private security firms has been proposed by Israeli-American businessman Mordechai Kahana's firm, Global Delivery Company (GDC), which has experience in war zones.

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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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Defense Spending

The UK government is expected to release its Strategic Defense Review in mid-2025, with plans to increase defense spending to 2.5% of GDP. Lockheed Martin is lobbying for a larger UK purchase of F-35 fighter jets, citing economic benefits, while the UK also faces a potential arms deal with Italy and Japan.

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Russia's War Economy

Russia's economy is under strain due to extensive military spending, but oil revenues and Western sanctions failures allow it to sustain the war for now. High military salaries are driving wage growth and inflation, and companies are struggling to keep up with the competition for workers.

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Military Spending Impact

Russia's extensive military spending is pushing its economy into overdrive, with heavy spending on occupying forces, high wages, and inflation. This has contributed to economic growth but is unsustainable in the long term, and Russia's economy is overheating.

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Global Manufacturing Decline

The global manufacturing industry is weakening, with declining activity in major regions like the US, Eurozone, and China. This is indicated by falling purchasing managers' indices (PMIs), especially in Germany. However, some regions like the UK, India, and Southeast Asia show growing manufacturing activity.

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Challenges in Traditional Industries

Japan's traditional industries, such as bookshops, are facing significant challenges. Rising costs, cashless transaction fees, and competition from e-commerce and digital alternatives are threatening their survival. The decline in reading among Japanese citizens further exacerbates these issues.

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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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Iranian Oil Facility Attacks

Markets are panicked by the possibility of Israel attacking Iranian oil facilities in retaliation for Iran's ballistic missile strikes. While the likelihood of such an attack is low due to logistical challenges and potential damage to foreign relations, Israel's aggressive messaging has put it in a strategically advantageous position.

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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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Economic Impact on Israel

The conflict with Iran and tensions with Palestine have economic implications for Israel. The potential disruption of oil supplies and volatility in oil prices affect Israel's economy, which is closely linked to the global energy market. Additionally, the controversy surrounding Israel's actions has led to divestment and economic pressure on companies associated with its military and defence industry.

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Healthcare Supply Chain Concerns

The potential sale of Opella, which produces France's bestselling drug Doliprane, has raised concerns about medication supply chain security. The Covid pandemic exposed vulnerabilities, with medication bottlenecks blamed on outsourcing production to foreign countries. The French government has emphasized the strategic importance of reshoring medicine production and securing supply chains.

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India's Growth Projection

The International Monetary Fund (IMF) maintains India's growth projection at 7% for FY25, a drop from 8.2% in 2023 due to exhausted pent-up demand post-pandemic. The projected growth rate is considered 'relatively mediocre' by the IMF, which recommends structural reforms to increase productivity and resilience.

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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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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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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 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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Military Tensions with Taiwan

China's military drills around the Taiwan Strait have raised concerns about a potential conflict with Taiwan, which could draw in the US and disrupt global supply chains. A clash between China and Taiwan is estimated to cost $10 trillion, impacting trade and causing economic turmoil.

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Mineral Security and Tech Supremacy

China has reported significant discoveries of minerals crucial for clean energy, quantum technologies, and defense. The competition for these resources is key in the tech supremacy race between Washington and Beijing. China holds the world's largest reserves of natural graphite and a significant share of rare earth minerals.

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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 Technology Race

China has accelerated its efforts to develop its own technology and reduce reliance on US semiconductors. This has negative revenue consequences for US firms and may lead to a shift in semiconductor supply chains away from the US. China is also making advancements in advanced packaging technologies to bypass US restrictions.

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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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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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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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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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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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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.

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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 change is expected to improve service, accessibility, and comfort for passengers, with new direct routes and affordable tickets. However, there are concerns that operators might focus only on profitable routes, limiting scheduling options and impacting less profitable lines.

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Economic Sanctions and Trade Relations

France has threatened economic sanctions on Opella's new American owners if they fail to uphold commitments to keep production, jobs, and management in France. This includes penalties of €40 million if production stops in key factories and €100,000 for each economic-related layoff. These sanctions reflect France's determination to protect its economic interests and reshore manufacturing jobs.

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Insurance Brokerage Expansion

WTW has launched an insurance brokerage service in Japan, offering solutions to commercial clients and wholesale facultative reinsurance placement services. This expansion highlights the growing importance of independent international brokers in Japan's evolving corporate insurance market, presenting opportunities for risk management and insurance partnerships.

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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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UK's Industrial Strategy

The UK government's new industrial strategy aims to steer the economy through the 21st-century challenges, with a focus on growth, clean energy, and investment in emerging industries like AI and robotics. However, there are concerns about regional inequality and a lack of consideration for geopolitics, Brexit, and support for traditional industries.

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Economic Contraction and Recession

Germany is facing its second consecutive year of economic contraction, with a projected 0.2% decline in GDP for 2024, following a similar downturn in 2023. This is due to a combination of conservative public investment, over-reliance on manufacturing and exports, external shocks like the Russia-Ukraine conflict, and high inflation. The country's export-oriented economy has not grown strongly since 2018 due to structural problems and geopolitical challenges.