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Mission Grey Daily Brief - July 17, 2024

Summary of the Global Situation for Businesses and Investors

The world is witnessing a confluence of critical events, from the attempted assassination of former US President Trump to the ongoing war in Ukraine and the political turmoil in Bangladesh. In Cyprus, tensions are escalating between Turkish and Greek Cypriots, while North Korea faces another blow as a senior diplomat defects to South Korea.

US-China Relations

The attempted assassination of former US President Trump has sparked discussions in China about the weaknesses of the US political system. This incident, along with the US-China trade tensions and the Taiwan conflict, has experts worried about a potential US-China cold war turning hot. The US has maintained and strengthened tariffs on Chinese imports, and both political parties are pushing to get tougher on China and its companies. The US must balance its approach to China, leveraging its technological advantage while also utilizing soft power to attract international talent and maintain its influence.

Ukraine-Russia War

The war in Ukraine continues to rage on, with both sides clashing over foreign policy and Russia's invasion. Ukraine is facing a war of attrition, relying heavily on international aid that may decrease over time. To sustain its economy, Ukraine is raising taxes and switching to internal resources. The recovery and reconstruction of Ukraine will be challenging due to population decline and refugee displacement. Sanctions on Russia's energy sector are necessary to stop its war efforts, and a total energy embargo could be effective.

Political Turmoil in Bangladesh

Bangladesh is facing violent political turmoil over the government's job quota system, resulting in the deaths of at least five people and injuries to over a hundred. The protests have disrupted traffic and halted railways and highways across the country. The situation highlights the need for businesses to monitor political risks and assess the stability of the operating environment.

Cyprus Conflict

Tensions are escalating in Cyprus as Turkish Cypriots and Greek Cypriots engage in a series of escalations along the buffer zone, including the deployment of large-caliber weapons and the installation of high-tech cameras. This situation could have broader implications for the region, and the international community must act to prevent open hostilities from breaking out.

North Korean Diplomat Defection

A senior North Korean diplomat based in Cuba, Ri Il Kyu, defected to South Korea with his family in November 2023. This is a significant blow to North Korean leader Kim Jong Un as Ri played a crucial role in representing Pyongyang's interests in Havana and blocking Cuba from opening diplomatic ties with South Korea. The defection underscores the challenges faced by the Kim regime in maintaining control and the potential for further defections.

Recommendations for Businesses and Investors

  • US-China Relations: Businesses with operations or supply chains in the US and China should closely monitor the evolving relationship between the two countries and prepare for potential disruptions due to escalating tensions.
  • Ukraine-Russia War: Companies with investments or operations in Ukraine should be aware of the ongoing war's impact on the country's economy and consider the potential benefits of relocating to Poland or the Czech Republic, which have experienced economic growth due to their EU membership prospects.
  • Political Turmoil in Bangladesh: Businesses operating in Bangladesh should assess the impact of the political turmoil on their operations and consider the potential risks of civil unrest and supply chain disruptions.
  • Cyprus Conflict: Companies with interests in Cyprus should monitor the situation and evaluate the potential impact on their operations. While the conflict is currently localized, there is a risk of escalation that could affect the wider region.
  • North Korean Diplomat Defection: The defection highlights the instability within the North Korean regime and the potential for further elite defections. Businesses should consider the implications of a potential shift in North Korea's political landscape and the impact on their operations or investments in the region.

Further Reading:

3 killed and dozens injured in Bangladesh in violent clashes over government jobs quota system - CHAT News Today

40 Dead, Hundreds Injured After Heavy Rain, Storms In Eastern Afghanistan - Radio Free Europe / Radio Liberty

5 killed and dozens injured in Bangladesh in violent clashes over government jobs quota - Toronto Star

A North Korean diplomat in Cuba defected to South Korea in November, a possible blow to leader Kim - CTV News

A senior N. Korean diplomat defected to S. Korea from Cuba, Chosun Ilbo says - 朝日新聞デジタル

As Press Freedoms Erode in Bangladesh, Political Cartoonists Are Being Targeted by An Increasingly Authoritarian Regime - Nieman Reports

As the US reels from Trump shooting, China sees weakness - Business Insider

At least 5 killed, more than 100 hurt in Bangladesh job quota protests - McDuffie Progress

Canada pleads for political calming in wake of Trump shooting - Maple Ridge News

Canada reflects on its history of political violence in wake of attack on Trump - CBC.ca

Cocked rifles and infrared cameras along Cyprus buffer zone stoke tensions that could spread farther - Hindustan Times

Economist Says Total Energy Embargo Will Make Russia Stop Its War on Ukraine - Kyiv Post

European Parliament re-elects Roberta Metsola of Malta to lead 720 member EU body - UPI News

Experts worry that a U.S.-China cold war could turn hot: ‘Everyone’s waiting for the shoe to drop in Asia’ - Fortune

Themes around the World:

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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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UK's Defence Strategies

The UK is considering its defence strategies, including the purchase of F-35 fighter jets or the development of a new-generation crewed combat aircraft with Italy and Japan. Lockheed Martin, the manufacturer of the F-35s, has highlighted the economic benefits of the programme to the UK, but there have been frustrations over the high cost and delays in weapon integration.

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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.

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Impact of Geopolitical Conflicts

The ongoing conflicts in the Middle East, particularly between Israel and Iran, have led to rising crude oil prices, affecting various sectors in India. Additionally, the Ukraine-Russia war has severely disrupted global supply chains, impacting the trade of key commodities such as food and energy resources.

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Wage Hike Push and Business Concerns

Prime Minister Shigeru Ishiba's pledge to significantly raise Japan's national average wage may hurt small businesses, as they struggle to secure funds to raise salaries and retain workers, amidst rising costs due to inflation and a weak yen.

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Israel-Palestine Tensions

Israel's refusal to renew a waiver for international banks to maintain ties with Palestinian financial institutions risks an 'economic catastrophe' in the occupied West Bank, according to US and European officials. This could paralyze the Palestinian economy, which relies on the Israeli shekel and banks.

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India's Economic Growth

The IMF maintains India's growth projection at 7% for FY25, a drop from 8.2% in 2023. The slowdown is attributed to exhausted pent-up demand post-pandemic. India's appeal to foreign investors is increasing, particularly as companies seek to balance the costs of US-China trade tensions and China's economic slowdown. India's political stability is also a key factor in its attractiveness for US buyers.

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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.

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Climate Change Impact

Thailand has been affected by intensifying storms and extreme weather events attributed to climate change, causing economic losses and casualties. The country is taking steps to address this, with Phase II of the Thailand Taxonomy focusing on the construction, real estate, manufacturing, agriculture, and waste management sectors.

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Russian Economic Crisis

Russia's economy is headed for a crisis, with high inflation and interest rates, a shrinking sovereign wealth fund, and a worker shortage. War spending has contributed to GDP growth, but if the war continues, the economy may face a severe recession and long-term stagnation.

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Defense and Geopolitical Tensions

Japan is boosting defense production and technology amid rising geopolitical tensions with China, Russia, and North Korea. It has committed to strengthening its military capabilities and increasing defense spending. However, there is indifference from the private sector due to low profitability, uncertainty of investment returns, and aversion to reputation risks associated with the defense business.

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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.

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Competition with the US

Competition with the US, particularly in aggregate economic growth, is a significant issue. China's favorable tax treatment of investments and heavy subsidies have contributed to its rapid growth, while the US faces fiscal and regulatory challenges. The US is considering countermeasures, including tariffs and reshoring industries.

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Food Insecurity and Climate Change

Environmental, economic, and political shocks have led to food insecurity and social unrest. Climate change, conflict, and supply issues impact food availability and access, with implications for US and global security.

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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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Export Ban Impact

Ukraine's export ban on military goods has helped local defense companies grow but is now hurting their business. Lifting the ban could generate revenue but risks Russian forces obtaining sensitive information and technology.

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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.

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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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Impact of Sanctions

Western sanctions on Russia are having a significant impact on its economy and ability to wage war. The US has sanctioned Chinese and Russian entities involved in providing military technology to Russia. These sanctions target the supply chain of dual-use items, which can be converted into military items. The war has also reshaped global trade and financial flows, with countries seeking loopholes to mitigate the economic impact.

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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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Military Equipment Shortage

Ukraine faces a shortage of military equipment, including artillery and ammunition, due to limited Western supplies and Russia's advantage in resources and manpower. Ukraine seeks to produce more drones and missiles with financial backing from Western allies.

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Supply Chain Resilience

Thailand is part of the Indo-Pacific Economic Framework for Prosperity (IPEF), which aims to strengthen supply chain resilience among member countries. The agreement addresses vulnerabilities and promotes diversification to mitigate the impact of disruptions, ensuring the efficient flow of goods during global crises and reducing risks associated with overdependence on certain regions.

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Israel-Iran Conflict

Israel's unprecedented attack on Iran's air defence systems and military sites has heightened tensions in the Middle East, causing market panic and raising fears of a full-scale conflict. Israel's response to Iranian missile attacks in October was limited in scope but left Iran vulnerable to future strikes. The conflict has significant implications for global oil markets and international relations.

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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.

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Hydrogen Energy Transition

Thailand is exploring hydrogen co-firing technology with Mitsubishi Power to transition to clean fuels. While this project aims to support Thailand's goal of carbon neutrality by 2050, there are concerns about the safety and environmental impact of storing hydrogen underground near the ocean. The financial and ecological risks are significant, and Thailand may suffer serious repercussions if the project fails.

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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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India's Role in Russia-Ukraine War

India has become Russia's second-largest supplier of restricted critical technologies, presenting a challenge to US and EU efforts to curb exports fueling Russia's war machine. India's exports of restricted items like microchips and circuits have increased significantly, with almost a fifth of Russia's military-industrial complex relying on India. This has made India a focus for US and EU sanctions agencies, with several Indian firms already facing western sanctions.

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US-China Competition

Competition with China is a key theme in US politics, with economic growth, military drills, and trade wars impacting businesses. China's lead in battery technology and supply chain control is a concern, while US tax policies aim to bolster economic growth.

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Shipping and Trade Resilience

Despite Russia's intensified attacks on Ukrainian ports and ships, shipping operations continue, demonstrating the resilience of Ukraine's seaborne trade. Companies like Maersk, Hapag-Lloyd, and HHLA remain committed to operating in the region, signaling a strong will to keep trade flowing.

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Scams and Fraud

Scams are a significant issue in Thailand, with over 89% of respondents in a survey reporting exposure to scams monthly. Online scams have resulted in substantial financial losses, impacting individuals and the country's economy. Efforts to combat scams include collaborations between private and public sectors, as well as the development of anti-scam technologies and early warning systems.

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US Election Impact

The upcoming US presidential election is causing uncertainty for businesses, with some postponing or canceling investment plans. The election is also influencing market volatility, with Donald Trump's gains in betting markets and polls impacting equities, the dollar, and expectations for economic policies.

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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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Taxation and Budget

The UK's Labour government's tax-raising budget, including increases to National Insurance and capital gains tax, aims to fill a fiscal gap. However, businesses warn that these measures could hurt hiring, push up inflation, and impact their ability to invest and grow.

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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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Gambling Legalization

The Thai government is considering legalizing casinos by integrating them into entertainment complexes to boost tourism and revenue. While this could have economic benefits, critics warn of potential social issues and gambling addiction in the Buddhist-majority country, especially without stringent regulations in place.

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US-China Competition

The US and China are in a race to dominate the global battery market, with China currently having a significant lead. China's dominance in lithium-ion battery technology and supply chain has resulted in US dependence on Asian imports. The US aims to secure its position in next-generation battery technology, but its funding has primarily supported current-generation batteries. China's growing influence in ports and debt diplomacy further impact global dynamics.