This week, we explore the financial, economic, and geopolitical state of the world. First, we discuss the ways that global finance, large companies, and energy commodities are changing in our new age of geopolitical and economic uncertainty. Then we move to an examination of the various threats to geopolitical stability, from North Korea to upcoming elections. We then look at the expansion of the conflict in the Middle East, as well as what it means for the rest of the world. We end this week with a story of contrasts; that of China’s slowdown and Japan’s return to the sun.

The Shifting Financial and Economic Landscape

Wall Street titans are betting big on insurers. What could go wrong?

The Economist

Microsoft Is the World’s Most Valuable Company. Now It Has to Prove It Can Stay There.

Andy Serwer, Barron’s

Why Oil Prices Rose After Shrugging Off a Crisis

Bob Henderson, Wall Street Journal

The nature of the financial and economic landscape is changing, including the nature of big insurers, large tech companies, and even commodities markets. For instance, private-market giants are increasingly buying and partnering with insurers – particularly in the $1.1 trillion market for fixed annuities. Private-market firms are shifting insurers’ portfolios toward less liquid assets with higher yields (like structured credit), backed by pools of loans. Concerns have arisen, however, about the increased exposure to structured securities, which are harder to sell and value. The complexity of this market, combined with illiquid and opaque investments by some insurers, raises concerns about proper risk assessment.

Another big change is in tech companies – particularly Microsoft, which has had its shares reach a record high, competing with Apple to be the most valuable company. While it’s valuation can bring to mind the company’s hefty price 25 years ago during the internet bubble, bets on Artificial Intelligence (AI) may be the factor that changes Microsoft’s trajectory. However, some worry that there may be a gap between AI hype and real-world performance, as AI may not be an immediate game-changer for most businesses. The nature of the oil market has changed as well. Oil prices, while being uncharacteristically calm during the chaos that is upending the Middle East, have risen recently driven by winter storms in the US impacting production, as well as a strong economy fueling demand. There is a global surplus of crude, and the large supply disruptions that brought the world to its knees in decades past may no longer drive how the market moves in our present era.

Threats to Geopolitical Stability are Mounting

Opinion | North Korea is preparing for war – in Ukraine and the Middle East

Josh Rogin, The Washington Post 

Why are European defence leaders talking about war?

Dan Sabbagh, The Guardian 

William Burns: Spycraft and Statecraft 

William Burns, Foreign Affairs 

Last week, Kim Jung Un demolished the monument to reunification in Pyongyang after announcing to his parliament that he was abandoning efforts to reunify with South Korea. Experts worry that these seemingly erratic actions are meant to distract both the West and his own people from his real priority: to advance his blossoming partnership with Vladimir Putin. Evidence is mounting that North Korea has been transferring arms to Russia. In return, Russia has protected North Korea and possibly assisted with advancing its missile and military satellite programs. Considering the long relationship between North Korea and Iran, it is no surprise North Korean weapons are reportedly also being used today by Hamas. Russia, North Korea, Iran and China seem to be all working together to ramp up their capacity to compete against the West in Ukraine and the Middle East for years to come.

With this, the international community, particularly the United States and Europe, faces the challenge of preparing for wider conflicts and adapting intelligence strategies. CIA Director William Burns notes that the agency is adapting its intelligence approach to the rising geopolitical tensions, emphasizing the integration of traditional human intelligence with emerging technologies in innovative ways. In Europe, concerns among defense ministers and armed forces are rising, fearing potential involvement in a conflict with Russia if a “NATO-sceptic” like Donald Trump is elected as the next U.S. president. Memories of his previous presidency linger in Europe, with questions about his relationship with Putin and his 2018 NATO summit threat that the U.S. might “go it alone” if other countries did not increase their military spending. “When I look at this year as a European politician, the first thing that goes through our minds is Trump,” said Manfred Weber, leader of the conservative European People’s Party in the European Parliament. These preparations and adaptations underscore a pervading threat to global security to be heeded in the coming years. 

Conflict Expansion in the Middle East Disrupts Global Supply Chains

The ever-expanding Middle East war

The Economist

Red Sea shipping disruptions ripple through Asia-Europe supply chains

Akira Kitado, Nikkei Asia 

What began in October as a war between Israel and Hamas has now extended beyond Gaza to include Iran, Iraq, Syria, and even Pakistan. Approaching its fifth month, the conflict shows no signs of resolutions. The Israeli army has yet to find the top leaders of Hamas or most of the Israeli hostages that the group is still holding and as the war drags on, regional tumult intensifies. Iranian-backed militias recently attacked an American air base, a barrage that followed a series of Iranian attacks across the region in Syria, Pakistan, and Iraqi Kurdistan. These incidents signal deep unease within the Iranian regime, which Israel is waging a not-so-secret war against, effectively expanding the conflict. 

Egypt has also entered the fray, leading the push to secure the release of hostages, though largely motivated by economic self-interest tied to stability in the Red Sea. Egypt’s concerns are not isolated, as repercussions of political unrest in the Red Sea extend globally. Global shippers are being forced to make more costly journeys and there is increasing pressure on companies to review their supply chains and prepare for a new norm characterized by longer transportation distances as shipping disruptions ripple through Asia-Europe supply chains. About 90% of the container ships sailing through the Red Sea have been forced to divert from the crucial trade route since mid-December. This increases the costs and times of shipping but also causes logistical concerns related to port capacity and fuel shortages. The shipping disruptions are hitting global manufacturing, especially in the automotive sector. In the bigger picture, this serves as a fresh reminder that global supply chains are subject to the unexpected shifts in the geopolitical landscape.

China’s Woes and Japan’s Rise

China’s $6 Trillion Stock Wipeout Exposes Deeper Problems for Xi

Bloomberg

As China’s Markets Stumble, Japan Rises Toward Record

Joe Rennison & Alexandra Stevenson, The New York Times

Analysis: Balance of power between Xi’s top two aides is tipping

Katsuji Nakazawa, Nikkei Asia

Japan seems to be profiting from China’s downturn. Stock indexes in Japan are approaching a record high from 1989, boosted by a weak yen, corporate sector reforms, and rising inflation. In contrast, China’s stock markets recently touched lows. Consumer confidence is low in China where the country faces an onslaught of a demographic crisis, a property-induced financial crisis, and the ever-tightening grip of the Communist Party on business activity. China has seen deflation, falling home prices, and struggling exports, and analysts believe that Beijing is not as willing to rely on debt-fueled stimulus for growth as it once was. At high levels of the government, China seems to be prioritizing national security over economic growth. Recently, national security czar Cai Qi presided over a ceremony on financial development in an apparent snub to Premier Li Qiang by President Xi, which didn’t help regain the trust of international investors in the country’s openness. Meanwhile, neighboring Japan has seen billions poured into its stock market as investors sell Chinese stocks and buy Japanese ones, and disillusioned Chinese investors are reportedly moving money into exchange-traded funds that track Japanese stocks.