Asia | China | Commodities | COVID | EEMEA | Europe | Global | Politics & Geopolitics | UK | US
Geopolitics Returns!
- By Bilal Hafeez
- Sign-up to discuss on Slack
- 1 min read
It wasn’t just economic activity that stopped in 2020, so did geopolitics. Trade wars, tensions in the Middle East and Russian cyberattacks all dropped from headlines as the COVID pandemic dominated politics. But with some normalisation of the pandemic and, crucially, a new US administration, geopolitics is returning as a risk investors cannot ignore.
Over the past week, we have seen Saudi Arabia normalise relations with Qatar – perhaps in anticipation of the incoming Biden administration. Saudi also cut oil production, which, intentionally or not, benefits Russia. Then China and the EU signed a Comprehensive Agreement on Investment (CAI), which could allow greater access to EU infrastructure (something to which the US has long objected). And the UK has finally broken away from the EU, opening up new possible geopolitical relationships for the UK.
On the financial system side, there is a geopolitical battle brewing between the US and China. This is over the US dollar’s centrality in global payments, since the US often weaponizes the currency as a foreign policy tool. China has made significant advances in its central bank digital currency, which could start to displace the dollar in the global payments system. The US meanwhile has taken steps to accept blockchain as a valid settlement system to offset the Chinese approach.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- New alliances in the Middle East, the EU-China CAI deal, and Brexit show geopolitics is back.
- The US-China battle on digital currencies and global vaccine distribution could be new fronts.
- The US has new leadership and Germany and Japan have significant leadership elections in 2021
Investment Implications
- Investors will need to monitor geopolitical risk as a factor.
- We could see more volatility in commodity markets and crypto.
It wasn’t just economic activity that stopped in 2020, so did geopolitics. Trade wars, tensions in the Middle East and Russian cyberattacks all dropped from headlines as the COVID pandemic dominated politics. But with some normalisation of the pandemic and, crucially, a new US administration, geopolitics is returning as a risk investors cannot ignore.
Over the past week, we have seen Saudi Arabia normalise relations with Qatar – perhaps in anticipation of the incoming Biden administration. Saudi also cut oil production, which, intentionally or not, benefits Russia. Then China and the EU signed a Comprehensive Agreement on Investment (CAI), which could allow greater access to EU infrastructure (something to which the US has long objected). And the UK has finally broken away from the EU, opening up new possible geopolitical relationships for the UK.
On the financial system side, there is a geopolitical battle brewing between the US and China. This is over the US dollar’s centrality in global payments, since the US often weaponizes the currency as a foreign policy tool. China has made significant advances in its central bank digital currency, which could start to displace the dollar in the global payments system. The US meanwhile has taken steps to accept blockchain as a valid settlement system to offset the Chinese approach.
Then of course we have the geopolitics of vaccines. The EU has fallen behind the UK in vaccine distribution, raising tensions in member states. Globally, the US and European countries are viewed as hoarding vaccines. This might allow China and Russia to distribute their own vaccines to many emerging markets and act as their saviour.
Finally, we are seeing the biggest change in global leadership in years. The US will have a new president on 20 January. Japan’s long-serving Prime Minister Abe stepped down last year, and there are Japanese elections in October. And Angela Merkel will finally leave German leadership, with German Federal elections in September. So, the US, Japan and Germany will have new leadership in 2021.
Taken together, these factors suggest 2021 could be the year of geopolitics.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)