19 September 2024

This Week:
EU Changes Commission and Regulatory Leadership
Fed Rate Changes Will Impact Global Economy
Private Companies and Cyber Espionage
U.S. General Explains Geopolitical Openings Against China
War in Middle East Expanding
Mexico Implements Judicial Reforms
Kazakhstan Seeks To Be Part of EV Supply Chain

See previous editions of P&M here

EU Changes Commission and Regulatory Leadership


The European Union is having a major reshuffle of personnel that will impact a myriad of policy areas. European Commission President Ursula von der Leyen has named a new team to lead the EU for the next five years, focusing on boosting competitiveness, military capacity, and a green energy transition. Key appointments include Spain's Teresa Ribera as the new antitrust chief, expected to intensify Big Tech regulation and ensure the EU’s climate goals are met. Lithuania's Andrius Kubilius will serve as the first defense commissioner, overseeing military capacity in response to Russian aggression. Estonia’s Kaja Kallas will head foreign policy, and several other key roles were assigned, reflecting a balance of national interests and gender representation. The new Commission is expected to take office by year-end, with its first major task likely being the impact of the U.S. presidential election on EU-U.S. relations.

 

Relatedly, two key architects of the European Union's digital regulations, Thierry Breton and Margrethe Vestager, are stepping down, creating uncertainty around the enforcement of the bloc's tech crackdowns. Breton, who oversaw the Digital Services Act (DSA), has resigned, while Vestager, responsible for the Digital Markets Act (DMA), will step down later this year. Their departures could weaken Europe's strong stance on regulating tech giants like Google, Apple, and Microsoft. Breton pushed for stricter rules on illegal content and transparency, while Vestager led significant antitrust efforts. Their exit raises concerns about how effectively the new regulations will be implemented without their leadership, as both left behind significant unfinished legislation. The shift in leadership may also signal a potential change in the EU’s regulatory approach despite Ribera’s appointment, especially following criticism of its current strategies. Europe is falling behind in technology and innovation, and their decidedly anti-tech company approach has hampered the overall economy of the trade bloc. It remains unclear how these changes in EU leadership will alter the technological and economic environment of Europe, but their decisions will determine if the trade bloc can make progress.

Fed Rate Changes Will Impact Global Economy


The Federal Reserve cut rates on September 18 by 50 basis points, seen as an aggressive move due to moderating inflation and a weakening labor market. The impact of these cuts on markets will depend on whether the U.S. economy enters a recession. Historically, stocks tend to perform better when rate cuts occur without a recession, with the S&P 500 gaining 14% in such cases, compared to a 4% decline during recessions. Bonds often perform well in recessions, and Treasury yields tend to fall after the first rate cut but rise as the economy recovers.

 

The U.S. dollar's response to rate cuts depends on how other global economies fare. In non-recessionary periods, the dollar strengthens, but deeper cuts during recessions erode its value. If other central banks cut rates in tandem with the Fed, the dollar may remain strong, but a U.S. recession could weaken it further. Analysts are watching closely to see if the U.S. experiences a soft landing, avoiding a major downturn, which would influence the extent and effectiveness of the rate cuts.

With the cut in rates by the Federal Reserve, the global economy will need to deal with the broader ramification. First, other central banks like the European Central Bank (ECB) and Bank of England (BoE) are likely to follow suit. However, fewer cuts are expected in Europe, with vigilance around inflation risks. A Fed cut will likely positively impact global bond markets that often aligned with U.S. Treasuries.

 

In addition, lower U.S. rates could allow emerging markets more flexibility to reduce their own rates and boost growth, with many already easing, particularly in Latin America and Europe. However, uncertainty around the U.S. Presidential election and subsequent fiscal policy complicates the outlook. Some economies hoping for a weaker dollar may be disappointed, though. The dollar has historically remained strong after a first Fed cut in recent cycles, but Asian currencies like the South Korean won and Thai baht have recently gained strength.

 

A global equity rally could resume if U.S. rate cuts boost economic activity and avoid recession. Markets may see gains, especially in sectors like real estate and utilities, that benefit from lower rates. Also, precious and base metals like copper and gold could benefit from lower U.S. rates, driven by reduced opportunity costs. Gold may outperform other metals due to its inverse relationship with yields.

Private Companies and Cyber Espionage


Cyberespionage is increasingly performed by private companies, and it is also impacting them significantly as well. For example, China's cyberespionage operations heavily rely on private cybersecurity firms, which compete for government contracts. A leak from midsized company iSoon exposed its deep ties to the Chinese government, revealing espionage activities in 22 countries. China's leading cybersecurity companies, like Qihoo 360 and Tencent, dominate the market by securing most government contracts. They excel in global hacking contests but are now limited to domestic competitions, such as the Tianfu Cup. The government mandates that cybersecurity firms report vulnerabilities to authorities, giving China a significant advantage in cyber warfare by quickly acquiring zero-day vulnerabilities for offensive use. This strategy helps China’s intelligence agencies leverage top civilian researchers at little to no cost. This issue also occurs between private companies, not just involving governments. Apple has filed a motion to dismiss its nearly three-year-old lawsuit against NSO Group, the developer of Pegasus spyware. Apple claims that continuing the case could expose sensitive security methods used to protect its users from spyware, especially as new surveillance companies have emerged. Despite weakening NSO Group, Apple argues that a legal victory now would have limited impact on the broader industry. Apple fears revealing critical security information that could be exploited by other spyware companies, potentially undermining its anti-spyware efforts, which it calls the most advanced in the world. As such, companies have moved to the forefront of cyberespionage, and they are increasingly involved in broader geopolitical issues due to this.

Conservative Groups Advocate for Tariffs on China

 

On September 9, over a dozen conservative groups urged U.S. lawmakers to unite in addressing the threat posed by China to American technological leadership. Conservative leaders emphasized the need for bipartisan action to counter China's growing influence in technology and research. The letter, signed by prominent figures such as James Edwards of Conservatives for Property Rights and Ed Martin of Phyllis Schlafly Eagles, calls for strengthening the U.S. patent system and protecting intellectual property rights to maintain technological dominance. The letter was sent as the House prepares for "China Week," which will involve votes on several bills related to China. Proposed legislation includes the Protecting American Agriculture from Foreign Adversaries Act, aimed at banning foreign adversaries from buying U.S. agricultural land, and the DHS Restrictions on Confucius Institutes and Chinese Entities of Concern Act, which seeks to prevent the Department of Homeland Security from funding institutions with Confucius Institutes. This letter is an indicator that the majority of the right in America have turned away from their pro-free trade position and towards protectionism, meaning that Trump’s national populism has permeated the majority of the movement. As such, organizations should start incorporating more protectionism in their political risk assessments.

U.S. General Explains Geopolitical Openings Against China

 

U.S. Air Force General Kevin Schneider stated that China's actions in the Indo-Pacific, particularly its aggression toward the Philippine coast guard in the South China Sea, are creating more opportunities for the U.S. to strengthen ties with regional allies and partners. Schneider noted that countries in the region are increasingly aware of the challenges posed by Chinese, North Korean, and Russian activities, leading to closer cooperation with the U.S. Schneider also commented on the recent naval and air drills conducted by China and Russia, describing their relationship as a "partnership of convenience" rather than a deep-seated alliance. Additionally, Schneider noted that while China's air force may soon surpass the U.S. Air Force in the number of aircraft, the effectiveness of these platforms and the skill of U.S. pilots are more critical factors. U.S. officials have previously assessed China's advanced aircraft, like the H-20 stealth bomber and J-20 fighter jet, as having limited capabilities compared to their U.S. counterparts. While this is just the assessment of one military figure in the U.S., the public statements are most likely an indicator of the views of the military and Defense Department. This view means that the U.S. will begin greater maneuvering in the Indo-Pacific against China.

War in Middle East Expanding


Israel's Prime Minister Benjamin Netanyahu vowed to impose a "heavy price" on the Houthi movement after they launched a hypersonic ballistic missile that reached central Israel, marking a significant escalation. The missile, intercepted by Israeli defenses, caused no direct casualties but resulted in injuries as residents sought cover. Netanyahu's warning followed past Israeli retaliatory strikes on Yemen, including after a Houthi drone hit Tel Aviv in July. The Houthis, aligned with Iran, have launched several attacks on Israel since the Gaza war began, declaring their actions as support for Palestinians. Houthi officials promised more strikes against Israel in the future.

 

In Lebanon, exploding walkie-talkies killed 20 people and injured at least 450 on September 18. This was a day after at least eight people were killed and 2,750 others wounded, when communication pagers exploded across the country. Hezbollah and the Lebanese government blamed Israel for the explosions, calling it an "aggression." The explosions are being called the biggest security breach Hezbollah has faced in a year of conflict with Israel. Many of those injured were Hezbollah fighters, including top officials' sons. Iran's ambassador suffered minor injuries. This comes amid ongoing tensions between Israel and Hezbollah since the Gaza war began in October. Additionally, Israel's Shin Bet agency claimed to have foiled a Hezbollah assassination plot earlier on the same day. Despite cross-border clashes, Hezbollah has stated it seeks to avoid full-scale war unless the Gaza conflict ends.

 

Israel has not explicitly commented on the blasts but stated today that it is "opening a new phase in the war," with the "center of gravity" shifting to the north, where it borders Lebanon. Israel aims to return displaced Israelis who were evacuated at the start of the war and to prevent Hezbollah from launching an attack similar to Hamas'. The recent strikes likely disrupted Hezbollah's communications and command structure, giving Israel an opportunity for further military action. However, it is unclear whether Israel is seeking a full-scale war with Hezbollah or merely signaling the consequences of further missile attacks or escalation. Even if Israel is not directly seeking a war, it is preparing for it.

Mexico Implements Judicial Reforms


Mexico's judicial reform, which allows voters to elect judges, officially took effect after its publication in the government gazette. This reform is a major win for President Andrés Manuel López Obrador as he nears the end of his term. López Obrador argued that electing judges would better serve ordinary citizens, while critics claim it will harm judicial independence and reduce investor confidence. The reform was approved by his allies in Congress and state legislatures, with the first judicial elections, including for Supreme Court justices, set for June 2025. This change is highly likely to harm Mexico over the medium term as cartels will influence judicial elections, and businesses will have to contend with arbitrary decision making.

Kazakhstan Seeks To Be Part of EV Supply Chain


Kazakhstan is boosting efforts to increase the production of metals essential for electric vehicle (EV) batteries by issuing hundreds of new exploration licenses to attract investment. The country, rich in critical materials like lithium, cobalt, and nickel, aims to become a reliable supplier amid tightening controls on rare earth exports by Russia and China. Kazakhstan has already signed supply deals with the European Union and Britain and is expanding its battery-grade metal processing capabilities. The government has streamlined exploration licensing, leading to a sharp increase in issued licenses. Despite its ties to Russia, Kazakhstan has remained neutral in the Russia-Ukraine conflict and continues to comply with Western sanctions.

“It is better to fail in originality than to succeed in imitation.”
- Herman Melville

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