In the last few days, the climate on the geopolitical front has overheated after the start of the US and UK bombing of Yemen and after the outcome of the elections in Taiwan. Antonio CesaranoChief Global Strategist of Intermonte, illustrates the dynamics in these crucial areas of the planet and the impact on the markets.
What is happening in the Middle East?
The US and UK bombings of Houthi positions in Yemen follow a series of attacks on ships transiting the Red Sea, which forced over 80% of large ships circumnavigate Africa, with a consequent increase in travel times and, above all, freight costs. This is the situation in the Middle East described by Cesarano. President Biden was keen to underline that, in conjunction with the bombings, a message was sent to Iran, a sort of signaling of the fact that the US intentions are not those of confrontation, especially in a delicate year like 2024, in view of the presidential elections next November.
Source: Intermonte
To better understand the current dynamics, Cesarano also makes a quick excursus. The Houthis are militiamen of the Shiite religion (the minority portion of the Islamic community, predominantly Sunni with the notable exception of Iran, which is instead Shiite), hostile to Israel and the US presence in the area. In 2014 the Houthis conquered the capital of Yemen and a long and bloody civil war ensued which pitted the government in power against a military coalition led by Saudi Arabia (with the participation, among others, of the United Arab Emirates). The coalition was strongly supported by Mohammed bin Salman, who in 2015 was Arab Defense Minister and who took advantage of the coalition’s support to climb the hierarchy of the royal house, reaching the point of being nominated heir to the throne.
After about 7 years of war and almost half a million casualties, continues Cesarano, a “ceasefire” was reached in 2022 and in September 2023, thanks to Chinese mediation, there was historic meeting of Houthi representatives with Arab representatives in the Saudi capital which, although the parties expressed satisfaction on the sidelines of the meeting, did not end with real peace. In fact, in the end, the Houthis remained in the area of Yemen, which overlooks the Red Sea and in particular the strategic gulf of Bab el-Mandeb, as can be seen from the map. The Houthis are in fact also supported financially by Iran, which in this way, although not directly overlooking the Red Sea, can exercise indirect influence on this area of the Middle East.
Source: Intermonte
What is happening in Taiwan?
Turning now to Taiwan, Cesarano underlines, the elections ended with the victory of the pro-independence candidate, disliked by China and without a majority in Parliament. The Taiwanese have in fact opted for separate voting between presidential candidates and parliamentary candidates.
China quickly remarked that the election “will not prevent the inevitable trend of China’s reunification,” while President Biden declared “The United States does not support Taiwan’s independence.” A statement which, according to Cesarano, may seem contradictory, but which in fact reiterates the US intentions, that is, of a Taiwan not formally independent (the USA has never recognized the State of Taiwan, recognized by only a dozen countries in the world) but not even annexed to China. Basically a sort of limbo.
Taiwan, Cesarano points out, plays a role strategic value both for the production of semiconductors (with an overall weight of over 60% on a global scale led by Taiwan Semiconductors), both from a geopolitical perspective, since its lack of annexation effectively hinders China’s ambition to become a power also at sea, where the primacy is in the hands of the USA.
Source: Intermonte
Keeping the above map in mind, in addition to the Strait of Bab el-Mandeb and the Isthmus of Suez, there is the Persian Gulf with another important strait, that of Hormuz. According to Cesarano, these two geographical places are particularly important for trade flows: the Red Sea covers approximately 12% of global trade (goods + raw materials) of which 30% of global cargo container traffic; while the Persian Gulf covers approximately 20% of global oil (equal to approximately 21 million b/d which at current prices corresponds to over $1.6 billion) directed mainly towards China and India and 25% of global liquid gas.
What are the possible impacts on the markets?
This situation of uncertainty on the geopolitical front caused a sharp movement on oil on Friday 12 January. As Cesarano explains, while Brent was trying to break through upwards to the 80$/b level, operators simultaneously strengthened the expectation of almost 7 cuts by the Fed in 2024, attributing a probability of around 75% to the starting hypothesis at March. The strongest evidence is represented by the strong purchases of 2-year Treasurieswith the related rate reaching 4.15%, the lowest since May 2023.
Source: Intermonte
The reaction may appear contradictory: if oil rises, the risks of a return to inflation increase, which should stop central banks from cutting rates. How then can this reaction be interpreted? According to Cesarano, operators in the bond sector may have followed the following reasoning:
if there is no direct clash between the front lines in sight (USA vs Iran and/or USA vs China), but everything is limited to the “second lines” (USA vs Houthis), then there may be tensions on the prices of trade routes such as to increase the risk of a slowdown/recession of Western economies (Europe first and foremost).
To avoid this riskcentral banks, primarily the Fed, would be called upon to make a substantial and timely easing of monetary policy.
Last Friday we had the opportunity to read in more depth the reasoning of the operators, faced with an escalation of tensions in the Middle East without, however, the direct involvement of the “heavyweights”. For Cesarano, this is also a useful indication for the next few months, in the event of a prolongation of tensions on the Red Sea, always remaining warning about how long Iran will remain on the sidelines of the conflictlimiting itself to indirect support for the Houthi and other Shiite militias in the area.
At the same time, China could orchestrate merely demonstrative military maneuvers and, in part, also implement tariffs and/or obstruct Taiwan’s supply channels as we get closer to the inauguration ceremony of the new president, scheduled for May 20th. Possible reprisals, concludes Cesarano, could temporarily revive a phase of relative scarcity of chipsincreasing their prices and, above all, slowing down the global production chain, given the strategic importance of chips.