Market commentators are asked every day to explain why a given market went up or down. Sometimes there are obvious causes of the changes. A war gives way to a ceasefire and prospects of an end to the deaths and damage. Share prices go up. A government announces more tax rises than expected hitting net profits, so equities go down.
Sometimes there is no single event or announcement that makes a big difference, so commentators are left offering more general descriptions of the mood. If the market is drifting down, geopolitical worries or tensions are often blamed. After all, there’s plenty around. The analysts are suggesting that maybe the wars in the Middle East will do more damage to trade and shipping, or the war in Ukraine could be escalated threatening energy supply and food production in Europe.
Anything which states may do which could cause disruption to trade, damage to commercial investment and deaths of personnel are bad geopolitical risks. Anything which governments and international bodies can do to boost free trade, add to world demand or make business life easier are favourable geopolitical risks.
Which risks are markets currently most worried about?
Markets are rightly worried about the wars in Europe and the Middle East. They are dreadful for those living through them, and bad for the world economy.
In the Middle East, Houthi attacks on shipping have led much trade to divert from the Suez Canal forcing shipping rates up as traders need to book a vessel for a longer journey around the Cape to get from China to Europe. There are worries that intensification of the war could lead to damage of Middle Eastern oil installations and reduction of world oil supply. There are no early signs of an ability to protect ships wishing to transit the canal.
In Ukraine, the relentless war reduces Ukrainian food exports and requires the West to ban and sanction Russian oil and gas. There are concerns of escalation as NATO countries increase their help to Ukraine and consider relaxing the rules over how their weapons can be used against Russia. Russia regards economic targets such as power stations as legitimate to impede economic output and harm normal life in Ukraine.
There are wider concerns about the general retreat from globalisation. Many in markets liked the first two decades of this century. China had joined the World Trade Organisation. More progress was made cutting the tariffs and other barriers to trade in goods, with the West welcoming cheaper Chinese products. Today there is a new wave of protectionism, with many in the West from US President Joe Biden downwards thinking China has exploited the position by selling too many subsidised products at low prices whilst keeping restrictions on access to her own markets. In the US and the EU new tariffs are being placed against Chinese electric vehicles. There is a scramble to subsidise and regulate to build up western green industries as a counter to Chinese success. The more tariffs and subsidies there are, the less efficient and the more costly things are likely to become.
The axis of fear
With Russia at war against Ukraine and with Iran through its proxies at war with Israel, there is a worry about the actions of a number of autocratic countries that dislike the West. Russia, Iran and North Korea work together and extend their influence throughout the emerging market world with alliances, trade agreements, military exchanges and development programmes. China often helps this group and has her own extensive contacts and client states through its ‘Belt-&-Road’ initiative.
There are worries about China’s political stance. China has made clear its wish to unite Taiwan with the Chinese People’s Republic. Beijing holds military exercises to show how much power it could deploy against the island. President Biden has said the US would go to Taiwan’s aid were China to make a move militarily against it, though official US policy is one of studied ambiguity.
In practice, the US offers considerable defence support and regards no change to Taiwan’s status as an important part of the world order. Any signs of China making threatening moves against Taiwan or taking a more direct role in either Ukraine or the Middle East would be taken badly by western governments.
The Middle East war
Israel's recent killing of Yahya Sinwar, the main architect of the Hamas terrorist attack on Israel a year ago, is thought by some to mark a watershed moment. Israel could claim a victory, pointing out many of the senior leaders of Hamas are now dead, and turn to negotiation. This does not seem to be their government's intention.
The Prime Minister points out Hamas are not returning the hostages. Hamas and Hezbollah are still firing rockets at Israel and Israel still has not replied to Iran's last mass missile attack. Intelligence findings have now been leaked implying Israel is planning a high-level missile attack on Iran, though the targets are not revealed. The US has made clear it does not want retaliation against Iran’s nuclear installations, nor against their oil resources.
The death of Yahya Sinwar is a big boost for Israel as he is seen there as the main terrorist villain and a hard liner in the Hamas approach to a ceasefire. The US is pressing Israel “to take the win” and now compromise for a peace. That would require considerably more movement from Hamas than we have seen, with the return of the hostages and credible statements of ceasing the rocket and terrorist attacks on Israel.
Prime Minister Netanyahu’s own position in Israel has just got stronger, and his aim is to kill more Hamas and Hezbollah personnel and seek buffers inside Gaza and Lebanon against future anti-Israel military action. Overall, it leaves risks much as before, with a limited wider Israel/Iran war now in Lebanon as well as Gaza. The US and other allies will continue to press Israel to avoid major escalation into a direct confrontation with Iran instead of just through proxies.
The US, NATO and many Middle Eastern states want a ceasefire and peace talks. Neither Israel nor Iran's proxies fighting the war wish to compromise. There remains huge distrust and many grievances on both sides. Hamas and Hezbollah want Israeli troops out of their territory and want a Palestinian state free from new Israeli settlements. It seems likely the wars will continue.
The European war
The European Union (EU) last weekend was complaining about possible Russian intervention in the Presidential election and EU referendum in Moldova. The EU sees the Russian invasion of Ukraine as part of a Russian war and movement to expand Russian territory to include more of the former Soviet Union to the west and south of current Russian borders. Russia sees it as a drive for European expansion, seeking to extend the EU through its control of more states up to Russia's frontiers, and now with Ukraine even taking some Russian land by military action.
The referendum in Moldova was not a simple Yes/No to pursuing EU entry. It was a vote about including a pro-EU stance in the constitution. Moldova has already lost an eastern portion of land next to the Ukraine border. Called Transnistria this is now under pro-Russian separatist management. Next weekend, elections in Georgia may reaffirm Georgia Dream in power. Whilst notionally pro-EU. this ruling party has been critical of Ukraine and has passed legislation on foreign influence that the EU dislikes.
There are no signs yet of a peace process gaining traction in either Europe or the Middle East.
An inconclusive referendum in Moldova, Chinese exercises off Taiwan and leaked documents about an Israeli response to Iranian missile attacks are reminders of the geopolitical risk that exists today. Wars are very bad for the people caught up in them, and bad for world trade and investment. There are no signs yet of a peace process gaining traction in either Europe or the Middle East.
There are continuing moves to impose more tariffs and sanctions, to onshore more activity, and to give the armourers more work. The risks are considerable but, so far, the leading players – the US and China – wish to avoid a more devastating and wider conflict. This enables markets to make progress despite the unhelpful political background.
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