Red Sea Danger

The Red Sea and the Gulf of Aden are one of the world’s most dangerous shipping routes.

The Red Sea and the Gulf of Aden are one of the world’s most dangerous shipping routes.

In March 2015, Saudi Arabia and an alliance of eight other mostly Sunni Arab states backed by the US, UK, and France, began airstrikes against the Houthis in Yemen. The Houthi Shia Muslim rebels seized control of northern Yemen and its capital in 2014. The Saudi-led coalition feared that continued success of the Houthis would give their rival regional power and Shia-majority state, Iran, a foothold in Yemen, Saudi Arabia’s southern neighbour.

Some eight years later after a humanitarian crisis, the Saudi-led coalition had not achieved its original strategic aims and entered discussions with a UN-brokered peace deal, which has been in effect since April 2022. This was making encouraging progress by September 2023, but then events were turned on their head with the Hamas-led terror attack on Israel on October 7th. We enter 2024 with fighting in Gaza between Israel and Hamas, and fire being regularly exchanged across Israel’s northern border between Hezbollah and the IDF.

Events have escalated further with Houthi drone and missile attacks on shipping in the Red Sea to which the US and UK have reacted by launching strikes on Houthi military assets in Yemen. These events are all linked to the events in Gaza with Iran supporting Hamas, Hezbollah, and the Houthis. With the IDF expected to continue operations in Gaza, it looks as if one of the world’s key sea routes which accounts for an estimated $3 trillion or 12%-15% of global trade, will remain a high-risk zone.

So far, markets do not appear to be too alarmed by the escalating events in the Middle East even though it could push up prices and impact global growth. Global shipping companies are having to re-direct ships around the Cape of Africa adding time and leading to higher freight costs, while there are signs of some impact on global supply chains. More significantly, oil and gas prices have not yet spiked higher despite the recent cold snap. However, Europe is now much more physically dependent on flows of shipped LNG (liquid natural gas) from Qatar, after supplies from Russian pipelines were stopped.

Will the US and UK succeed where the Saudi Arabian coalition failed? Will the Gulf shipping route ever be as safe again? Qatar’s PM said the ‘central issue‘ of Gaza must be addressed to calm the situation in the Red Sea. ‘Military intervention will not bring an end for this, will not contain it, I think it will create further escalation.’

What have we been watching?

Markets have been relatively calm given the escalating tension in the Middle East and both oil and gas prices have remained stable. Investors will no doubt be watching global company updates closely in the months ahead for further colour on supply chain disruption and freight costs. Otherwise, market focus remains on central bank interest rate messaging and particularly that of the US Federal Reserve (Fed) on 31st January. Central bankers globally have been trying to moderate expectations for rate cuts with some members of the Fed pushing back against market expectations for six interest rate cuts in 2024. A blip in UK inflation and yet more weak Chinese economic data, saw markets give up some of last year’s Santa rally.

Despite the US and UK attack in Yemen, the Houthis are still harassing military and commercial shipping off the coast of Yemen and two vessels were hit by missiles last week. The US conducted further strikes on Houthi positions last week. US military intelligence suggests about 25% of the Houthis military arsenal has been destroyed so far. Qatar, the world’s second largest supplier of liquified natural gas (LNG) has stopped sending LNG tankers through the Red Sea. Meanwhile, Iran appears to be escalating matters by undertaking missile strikes on Iraq, Pakistan and Syria.

Tension between China and America’s allies shows no sign of easing in the Pacific. Following the Taiwan election result comes news that the Philippines is planning to develop military support facilities on several key islands in the South China Sea.

 

In the UK, wage growth appears to be moderating with a 6.6% increase in the three months to November. However, there was a blip in inflation in December with CPI at 4% a bit higher than expected and above November’s 3.9%. Core inflation was unchanged at 5.1%. Some elements of inflation are proving sticky, particularly in services. However, with food prices easing and lower energy prices headline inflation is expected to drop below target from April. Many expect the Bank of England to start to cut interest rates as early as the first half of 2024 but will it be more cautious?

 

In Europe, any discussion of an interest rate cut by the European Central Bank (ECB) may be premature according to the president of Germany’s Bundesbank. ‘The markets are from time-to-time over-optimistic.’ It should be noted that the Bundesbank tends to be overly cautious. The president of the European Central Bank, Christine Lagarde also sought to push back against market hopes of a Spring interest rate cut but does not appear to be ruling out the fist cut this summer.      

 

In the US, Donald Trump won the first of the Republican primaries held in Iowa, securing 51% of the votes cast. Meanwhile, US retail sales climbed at the fastest pace in three months in December signalling consumer sentiment resilience although not helpful for those expecting an early Fed interest rate cut. Over the weekend, Ron DeSantis has dropped out of the 2024 presidential race and endorsed Donald Trump, leaving Nikki Haley as Trump’s last remaining challenger, with Trump the strong favourite.

Read our latest Chinese investment insights from Alpha PM

 

Chinese economic data disappointed again with industrial production, retail sales and fixed asset investment all weaker than expected in December. China’s economy is thought to have grown by ‘around 5%’ in 2023, underperforming expectations slightly. Markets expect the authorities to target a similar rate of economic growth in 2024. China faces many domestic challenges and the latest is that the population suffered a second consecutive annual decline in 2023 on the back of a record low birth rate and a wave of Covid-19 deaths.

Read our latest investment insights from Alpha PM

 

Despite growing tensions in the Red Sea and reports of more oil tanker and marine shipping diversions Brent oil was stable at $78 as weak Chinese economic data raised concerns about oil demand. UK natural gas futures continued to fall despite the recent cold snap.

Finally, new analysis from the IMF estimates that nearly 40% of all global jobs could be affected by AI. However, this could be more pronounced in developed economies where up to 60% could be impacted compared with 26% in low-income countries. The IMF also predicts a potential major demographic shift with higher-income and younger workers possibly seeing a disproportionate increase in their wages after adopting AI while lower-income and older workers could fall behind.

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