what is happening and impact on the markets. The analysis

Very hot climate on the geopolitical front after the US and UK bombings on the Yemen and the outcome of the elections a Taiwan: what is happening and what are the impacts on the markets?

“The bombings USA and UK sat the Houthi positions in the Yemen they follow a series of attacks on ships transiting the Red Sea, which forced them over 80% of large vessels dimension to circumnavigate Africa, with a consequent increase in travel times and, above all, in freight costs.
President Biden was keen to underline that, in conjunction with the bombings, a message was sent to all‘Irana 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 of next November“, explains Antonio Cesarano, Chief Global Strategist of Intermonte.

What is happening in the Middle East and Taiwan?

Making a quick excursus – continues Cesarano – the Houththey are Shiite militiamen (the minority portion of the Islamic community, predominantly Sunni with the notable exception of Iran, which is Shiite), hostile to Israel and the US presence in the area.

In the 2014 the Houthis they 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, in 2022 a “cease-fire” and in September 2023, thanks to Chinese mediation, there was the 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 they remained in the Yemen area, 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.

Moving on instead to Taiwan, 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 immediately remarked that the elections “noThey won’t prevent the inevitable trend towards the reunification of China,” as President Biden said “The United States does not support the independence of Taiwan”. A statement that may seem contradictory, but which in fact reiterates the intentions USA, that is, of a Taiwan that is 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 has a strategic value both for the production of semiconductors (with an overall weight of over 60% on a global scale led by Taiwan Semiconductors), and from a geopolitical perspective, since its failure to annex effectively hinders China’s ambition to become a power also at sea, where primacy is in the hands of the USA.

Why is the Middle Eastern area so important?

Cesarano underlines how “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. Translating these two geographical locations into 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”.vv

Friday 12 January, while the brent was trying to drill upwards at 80$/b, operators simultaneously strengthened the expectation of almost 7 cuts by the Fed in 2024, attributing a probability of around 75% to the hypothesis of starting in March. The strongest evidence – we read in the analysis – “is represented by the strong purchases of 2-year Treasuries, with the related rate reaching 4.15%, the lowest since May 2023 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? The operators of bond sector they might have followed the following reasoning.”

Possible impacts on the markets

“If there is no direct clash between the front lines (USA vs Iran and/or USA vs China), but everything is limited to “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). To avoid this risk, central 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 Middle East without, however, the direct involvement of “heavyweights”.

China, “paper” chip

A useful indication also for the coming months, in the event of a prolongation of tensions on the Red Sea, always being on guard as to how long Iran will remain on the sidelines of the conflict, limiting itself to indirect support for the militias Houthis and other Shiites in the area.
At the same time – concludes Cesarano – “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 next May 20th. Any reprisals could temporarily revive a phase of relative scarcity of chips, increasing their prices and, above all, slowing down the global production chain, given the importance strategy of chips”.