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Proxy Wars in the Middle East and Taiwan's Future
Lai's win underscores Taiwan's resistance to China's unification threats
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In this publication:
Rate Cuts Postponed
Stock market hits all-time high
Ghana negotiates restruturing agreement
Taiwan Picks New President, Enrages China
Proxy Wars in the Middle East
Let’s dissect
Markets Snapshot
As of 19/01/2024 market close
Debt Securities
EU: In the most recent ECB meeting minutes, policymakers reached a consensus that inflation is anticipated to reach the 2% target by 2025. However, differing views on the timing of achieving this goal and persisting uncertainties related to wages and the underlying dynamics of inflation led officials to agree on sustaining a cautious monetary policy stance.
ECB members now view a ratings cut as less likely or postponed in 2024:
ECB Council member Holzmann sees a slim chance of 2024 rate cuts and dismisses the rationale for discussing a cut, noting a genuine recession is not anticipated unless there's a significant economic shock. Chief Economist Lane suggested a likely first cut in June (analysts initially expected the first cuts in March).
USA: President of the Federal Reserve Bank of Atlanta Raphael Bostic warned against early rate cuts, citing unpredictable inflation. Despite a gradual decline toward the 2% target, he anticipates a moderate rise, with a possible stall. December's CPI report shows a spike to 3.4%. Bostic expects inflation to stabilize around 2.5% by the end of 2024 and reach the Fed's target by 2025.
Equity Markets
S&P surged to an all-time high on Friday, as large tech companies posted strong gains, propelling the S&P 500 to reach 4840. The main US equity benchmark rose 0.8%, surpassing the previous intraday record set on January 4, 2022.
Despite Friday's ascent, the S&P has only seen a 1% increase in January, a significant slowdown compared to the 16% rally observed during nine consecutive weeks of gains from late October. Market momentum slows in January as optimism about quick interest rate cuts by the US Federal Reserve diminishes.
Global Finance
Ghana Wins Debt Moratorium
Ghana has successfully reached a deal to restructure $5.4 billion of bilateral loans with official creditors, securing a debt payment moratorium until May 2026. The agreement paves the way for the IMF board to approve a second disbursement of $600 million to Ghana as part of the country's $3 billion IMF program and unlocks approximately $550 million of additional funding from the World Bank.
Ghana defaulted on most overseas debt in December 2022 amid surging servicing costs. It has already managed to restructure the majority of its local debt last year and anticipates to finalize a separate agreement with eurobond investors to restructure its $13 billion debt by the end of March.
In Davos, Finance Minister Ken Ofori-Atta announced a repayment plan for $5.4 billion in bilateral obligations, with payments split into two tranches spaced 16 and 17 years apart. Payments due from 2023 would be repaid in 2039 and 2040, while those scheduled for 2024 would be settled in 2040 and 2041. The cut-off date, indicating the date after which new loans signed with bilateral creditors will not be restructured, has been revised to December 2022 from the initially proposed March 2020.
The debt restructuring is taking place under the Common Framework, established by the Group of 20 economies during the COVID-19 pandemic. Chad, Ethiopia, and Zambia have also sought debt relief under the framework but faced delays in the negotiation phase due to coordination challenges and disagreements over assessing the comparability of treatment among various creditors. Ghana's successful negotiation with eurobond investors could mark it as the first country to complete the debt restructuring process under the G20 framework.
Geopolitics
Taiwan’s Balancing Future with the New President
Vice President Lai Ching-te of the Democratic Progressive Party (DDP) has won Taiwan presedentional election. The victory marks an unprecedented democratic milestone, representing the first time a political party in Taiwan has secured a third consecutive presidential election.
However, the party lost its parliamentary majority, with the DPP holding 51 seats against the opposition Kuomintang's 52 and the Taiwan People's Party's 8. This presents challenges to Lai's spending plans and potential assertive approaches towards China.
Beijing asserts that Taiwan is its own territory and threatens potential military action if Taipei indefinitely rejects unification. Lai himself, once a self-proclaimed 'worker for Taiwanese independence,' has been labeled a "separatist" and a "troublemaker through and through" by Chinese officials.
Nonetheless, In their post-election statements, both Beijing and Lai sounded relatively cooperative. China's Taiwan Affairs Office expressed a commitment to collaborate with Taiwan, while Lai urged Beijing to find ways to ease tensions, emphasizing the crucial responsibility to maintain peace and stability in the region.
Taiwain stands as a major flashpoint in relations between Washington and Beijing. The island manufactures 60% of the world's semiconductors, including 90% of the most advanced chips, playing a crucial role in the global economy and supplying the technology and AI sectors worldwide.
Our thoughts:
The geopolitical balance around Taiwan is delicate issue. China's aggressive approach towards Taiwan have yielded counterproductive results. Lai's presidential victory underscores Taiwan's resistance to Beijing's unification threats, highlighting the Taiwanese people's reluctance to support candidates with a friendlier stance towards China.
If China refrains from aggressive military maneuvers and tones down its threats, and the U.S. carefully manages communications without provoking the communist regime, disruptions to chip production and your favorite iPhone models can be avoided.
Iran Strikes and Being Struck Back
Iran strikes alleged Israeli Spy Base in Iraq in retaliation for the assassination of one of its commanders in Syria. It was also Iran's first public acknowledgment of attacking Israeli target since start of the war. Iran's foreign ministry stated the attack was the the response to threats to its security but did not specify if further strikes were planned.
Iran's strikes claimed four lives in the Iraqi Kurdistan region and also hit alleged Islamic State group targets in Iraq's western neighbor, Syria. Iran claimed to have destroyed the "Zionist regime's spy headquarters in the Kurdistan region" but Iraq dismissed the claim, recalling its ambassador from Iran on Tuesday.
After striking Iraq and Syria, Iran fired missiles at Jaish al-Adl in Pakistan's Balochistan. In response, Pakistan recalled its ambassador, barred Tehran's envoy, and launched targeted strikes on Iranian bases, marking an unusual escalation that has heightened alert levels in both nations. After Pakistan's strikes, neither side has taken any further military action against the other.
Those strikes are the most recent indication of escalating turmoil in the Middle East amid the Israel-Hamas war. The US and UK targeted Iranian-backed Houthi militants in Yemen multiple times following Houthi attacks on multiple commercial boats throughout the last week. President Joe Biden pledged that the strikes would persist.
Our thoughts:
Iran's attacks in Syria, Iraq, and Pakistan may seem unrelated, but there's a common thread: the need to respond to maintain the perception of the country as a rising geopolitical threat in the region. The attacks also show that Iran is trying to balance its attempts to retaliate with avoiding potential escalation. The country is reluctant to engage in direct conflict with Israel or the United States, but the risks of a wider conflagration have been on the rise.
Another point to make is on Iran - Israel relations itself. Two countries have engaged in proxy wars since the 1979 Iranian revolution, with Iran openly calling for the demise of the Israeli state. The current escalation after the invasion of Gaza was expected as Tehran aims to undermine Israel's intentions of eliminating Hamas.
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