At the Intersection of Geopolitics and Geoeconomics

March 19, 2024 | Volume 7, Issue 3 | The BlackSummit Team

Here is a summary of important events that unfolded over the last month, and which may affect economic, financial, and geopolitical issues in the months ahead. Starting this month, at the end of each section we have inserted a few lines on market implications based upon the reported developments.

Top News This Month

• Biden and Trump secure nominations for election rematch. 

• Sweden officially joins NATO, ending decades of post-World War II neutrality. 

• Indians will head to the polls in the largest election in history with over 900 million eligible voters. 

• Humanitarian groups are delivering aid to Gaza using new land and sea routes. 

• Haitian prime minister resigns amidst spiraling political crisis while the international community struggles to piece together a solution. 

• Over 25 million people in Sudan, South Sudan, and Chad are confronting severe food insecurity, threatening to trigger the world’s largest hunger crisis. 

North America

• US President Joe Biden and his predecessor Donald Trump both secured their respective parties’ presidential nomination earlier this month, leading to a rematch of the 2020 presidential election. With Donald Trump facing 91 felony charges regarding allegations that he plotted to stay in power after his 2020 defeat, President Biden’s campaign is focused on appealing to voters over Trump’s behavior, much like in 2020. The challenges that the president faces include his own age, as well as criticism from his party’s left wing over his handling of the Israel-Hamas war.

• US intelligence agencies released a report that said the country faces an “increasingly fragile world order”, fraught with geopolitical tensions and regional conflicts. The report highlighted countries like China, Russia, Iran, and others as challengers to a rules-based international order. The report also mentioned the risks of the Israel-Hamas war expanding in the Middle East. The agencies also warned of the possibility that China may attempt to influence US elections in 2024 to destabilize the country.

• President Biden’s proposal for a $7.3 trillion budget for the next fiscal year includes raising taxes on the wealthy and large corporations, lowering the deficit, and decreasing the costs of prescriptions, childcare, and housing. The proposal would lower the deficit by $3 trillion over the next 10 years and raise taxes by $4.9 trillion. Defense spending would increase from $886 billion to $895 billion. The proposal is, as of now, largely symbolic, as the president has still yet to come to agreement with Congress on the budget for the current fiscal year (beginning October 1st).

• In a 352-65 vote, the US House of Representatives passed a bill that would force the owner of popular social media app TikTok, Chinese company ByteDance, to divest itself from the app or have it banned from US app stores and web hosting services. Supporters of the bill, which include both Republicans and Democrats, say that Chinese ownership of the app is a national security threat, as ByteDance could share data from American users with the Chinese government. While President Biden supported the bill, his predecessor Donald Trump was the loudest voice on the right opposing the bill, which he said could benefit Facebook. For the bill to go into effect, it still needs to pass through the Senate where its fate is so far unclear.

• Market Implications: The pre-election cycle could infuse volatility into the market starting this summer, while disputed results could be a major negative force. Budget implications represent a force for elevated rates while the long-term picture of the debt structure could undermine medium-term prospects for the markets. Those forces along with an elevated equity market are determinants of a correction within the next few months.

Europe

• As the war in Ukraine continues, Ukrainian forces are finding it more difficult to defend against Russian attacks as it faces ammunition and manpower shortages after over two years of war. French President Emmanuel Macron highlighted the potential consequences of a Ukrainian defeat, saying that Europe’s security as a whole would be threatened, and refused to rule out sending European troops to fight in Ukraine despite harsh criticism from both allies and Moscow. Russian President Vladimir Putin, who was just re-elected over the weekend for a fifth term, reiterated Russia’s nuclear doctrine, that it is ready to use nuclear weapons if “the existence of the Russian state” is under threat.

• The European Union (EU) presented a plan for an overhaul of the bloc’s defense industry for the first time. The strategy includes buying more weapons from EU members instead of the United States; including Ukraine in the bloc; ensuring supply security; financing factories to supply arms even in peacetime; and cutting red tape. Josep Borrell, the EU’s top diplomat, said that “after decades of underspending” the EU must invest more in defense, especially in light of Russian aggression. The EU wants half of national defense procurements to go to European companies by 2030 – currently, around 80% of weapons are bought from foreign companies (60% of which are from the US). The European Commission has only planned €1.5 billion for the industrial defense plan, but officials want that greatly expanded. Another key feature is that Ukraine would be treated almost as a full member, able to participate in joint procurement of arms, as well as having Ukrainian firms eligible for the industrial defense plan funds.

• Sweden officially ended decades of post-World War II neutrality when it formally joined NATO on March 7th, 2024. US President Biden hailed Sweden’s admission, saying that it was a sign of greater unity against Russian aggression in Ukraine. The country’s accession follows that of Finland’s, as both applied for membership following Russia’s invasion in early 2022. Sweden’s membership was held up by NATO members Turkey and Hungary, where the former complained of Sweden harboring groups it regards as terrorists, and the latter’s President Viktor Orban showing pro-Russian sentiment.

• Polish President Andrzej Duda called for other NATO members to increase their defense spending to 3% of their gross domestic product on the eve of his visit to the White House, where he and the Polish Prime Minister Donald Tusk were both invited. On March 12th, Poland (along with the Czech Republic and Hungary) marked the 25th anniversary of their accession to the military bloc. Poland spends 4% of its GDP on defense, the most in percentage terms in NATO. Duda argued that NATO members must step up due to a hostile Russia, which he claimed is allocating nearly 30% of its yearly budget on military spending.

• Market Implications: Despite the fact that the European Union, on average, is going through times of economic stagnation, its equity markets are enjoying good returns this year. The forthcoming decision by the ECB to lower rates within the next two months should boost those returns, however any market correction on the US side would also affect European markets. For now, this year is shaping up to be a year when European equity markets outperform the US market.

Asia, Eurasia, & the Pacific

• India has assigned 10,000 soldiers, previously on the country’s western border, to guard the Himalayan border with China. The force, combined with forces already present, will guard over 330 miles along the contested region. Both China and India have increasingly militarized the border, especially following a 2020 clash between the two forces that resulted in the deaths of 20 Indian soldiers. Indian Prime Minister Narendra Modi further inflamed tensions by visiting the northeast border state of Arunachal Pradesh, saying the state is “an integral and inalienable part of India.” The leader also inaugurated infrastructure projects in the state during the trip. Beijing issued a diplomatic protest with New Delhi in response to the visit.



• China has announced an economic growth target of 5% for 2024, a goal that some analysts believe is ambitious. Chinese Premier Li Qiang announced intentions to defuse the property crisis underway in the country, threatening property developers, indebted cities, and the overall economy. The announcement also called for higher defense spending alongside sharpening rhetoric toward Taiwan. Additionally, China said it would cut tariffs on advanced technology and open new channels for international trade.

• Indians will head to the polls this year, expected sometime before May, in the largest election in history with over 900 million eligible voters. Prime Minister Narendra Modi and his party, the Hindu nationalist BJP, are expected to extend their rule. India’s elections are also expected to be the most expensive in the world, with the myriad of political parties spending over 1.2 trillion rupees. If the election schedule is the same as 2019, voting will begin in phases about halfway through April and continue for around 40 days.

• Sri Lankan President Ranil Wickremesinghe told the country’s parliament that the government was seeking a pause on loan payments for five years and then would begin paying from the beginning of 2028 through 2042. Sri Lanka had declared bankruptcy in 2022 and suspended loan payments on $83 billion while suffering a foreign exchange crisis. The crisis brought on a shortage of food, medicine, and other essentials. The economic trouble caused unrest that pushed then-President Gotabhaya Rajapaksa to flee the country. Wickremesinghe’s government has since alleviated some of the issues – the currency has strengthened, inflation has dropped from 70% to 5.9%, and interest rates have fallen to about 10%.

• Market Implications: Despite economic headwinds in China, the Chinese market is performing well in the last two months, and signs are that good performance may continue for the next few months. The Japanese market continues to also be performing well and following today’s decision by the central bank to stop its control on the yield curve and the negative rate policy, the equity market may get a boost as interests in Japanese firms rise. The Indian market has been performing well for some time now and while Modi’s re-election seems to have very good chance of happening, we would not be surprised if the rising equity market in India takes a breather. 

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