As the Israel-Hamas war continues on, we begin this week’s newsletter by learning more about the spillover effects of the conflict that has the potential to bring in other regional actors. Moving on to examine key market trends, we take a look at the AI-fueled dominance of tech companies this year, as well as Big Oil’s recent success amidst geopolitical conflict. Finally, we assess Europe’s efforts to balance its global interests with liberal values.

Israel-Palestine On Fire

As Israel’s invasion of Gaza nears, the obstacles get more daunting

The Economist

Iran’s ayatollahs play the Middle East’s most dangerous game

The Economist

The ongoing Israel-Hamas conflict is the most dangerous flareup in the long line of Arab-Israeli conflicts in at least 40 years, with Israel calling up its entire armored corps and around 360,000 reserve forces as it prepares to launch a ground assault into Gaza. Complicating matters are Israeli concerns over Hezbollah to the north, which may enter the war on behalf of Hamas, and the West Bank to the West, which may descend into chaos as anger over Israeli action in Gaza takes hold. Iranian actions and influence in the region have only exacerbated tensions, as the country actively seeks to build a coalition of Arab states against Israel, while activating its “axis of resistance” forces, which includes Hezbollah in Lebanon and other groups in Syria, Iraq, and Yemen. Those efforts have seen some success, especially in the wake of the Ahli hospital bombing, which resulted in widespread condemnation of Israel from the Arab world and the cancellation of a summit between Biden and Egyptian, Jordanian, and Palestinian leaders. As such, the risk of escalation in the region is significant as the world awaits the Israeli offensive and the repercussions that action will have both in Gaza and the Middle East more broadly. 

Tech’s Dominance Leads to New Risks

‘Magnificent Seven’ tech stocks drive US equity domination to new highs

Nicholas Megaw, Financial Times

UK to warn ‘Davos in desert’ that next big global shock could come from tech

Lucy Fisher, Financial Times

Just seven large American tech companies have been responsible for the gains in global stocks this year. Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla have been supporting markets this year due to investor interest in the growth of artificial intelligence (AI). Without the seven firms, MSCI’s benchmark All-Country World index of around 3,000 large and midsized companies would have fallen year to date. American firms make up around 60% of the $60 trillion index, having risen from less than 50% ten years ago. Analysts don’t see any clear threats to tech stocks in the immediate future, but some believe that the stocks could sputter if AI growth proves less beneficial than believed. Even if this happens, however, market watchers thinks that American growth stocks could get a boost from declining interest rates.

Related to the growth of AI, Britain’s deputy prime minister, Oliver Dowden, has said that the “world’s next shock will be a tech shock”, and so has announced the creation of a UK public-private form on economic security challenges. This announcement comes as the UK government focuses more on AI, as it is also holding a summit on AI safety next week. Dowden believes that greater economic security is necessary to protect firms, investors, governments, and the public from hostile state actors that would exploit sensitive technologies. He claims that AI and other technologies will present digital challenges at a scale so far unseen.

Why big oil is beefing up its trading arms

The Economist

Instability in the energy market has strengthened trading opportunities in energy commodities such as oil and gas, as the world enters a period of less commodity cycles and greater commodity spikes. Much of the instability is geopolitically driven, as oil and gas have regionalized in the wake of Russia’s invasion of Ukraine, while events such as the Israel-Hamas conflict further exacerbate instability in the market. As such and in a sign of the times, US oil supermajor ExxonMobil has reopened its trading desk, which it had shuttered two decades ago. Meanwhile, European supermajors like BP, Shell, and TotalEnergies have quietly beefed up their trading desks over the past twenty years and reaped a profit of $15 billion in 2022. All in all, 2022 saw $115 billion in profits, a 60% increase for energy commodities traders, including the smaller private firms such as Trafigura, Glencore, and Vitol and large Arab supermajors such as Saudi Aramco, Abu Dhabi National Oil Company, and QatarEnergy. Further, while fossil fuels commodity trading is hot, opportunity likewise exists in renewable markets as, for instance, some majors have begun trading in lithium. As a whole, traders are set to reap large profits and the industry is well on its way to reaping those gains.

Europe Must Reinvent Itself

The Geopolitics of EU Enlargement

Mark Leonard, Project Syndicate

Azerbaijan’s victory over Armenian enclave raises fears of another war

Polina Ivanova, Financial Times

As the European Union (EU) adapts to the new, rapidly-changing geopolitical environment, it is looking not only at enlargement in Eastern Europe but also at the reinvention of its role on the global stage. Hoping to balance its global interests with liberal values, this reinvention is built upon three pillars. The first is security – in a world that has seen various conflicts reignite (Ukraine-Russia, Israel-Palestine, Armenia-Azerbaijan), it’s imperative that Europe can secure its own borders without relying on NATO alone. This is especially apparent in the wake of the conflicts on the continent’s periphery; after Azerbaijan’s conquest of the breakaway region of Nagorno-Karabakh, European diplomats are worried that Baku may someday push its gains to southern Armenia, which divides Azerbaijan from its western enclave. Europe must have hard power to back its soft. The second pillar is the economy; at its conception, the EU is a peace project designed to economically link France and Germany so closely that there would never be a war between the two again. As great power competition leads to further fragmentation of the global economy, Europe must foster relationships with a diverse range of partners in order to secure growth and economic strength. The third and final pillar that would reinvent the EU is values. The tension between liberal states and illiberal ones (for example, Poland and Hungary), is high. The outcome of this tension is far from assured – the far-right is already in power in Italy, and may be in France if Marine Le Pen wins the 2027 election. The European Union must both expand and deepen its integration, a process which must be built upon these three pillars if it is to survive and thrive in a new era of geopolitical upheaval.