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Choppy Waters in the Red Sea

Prospect of disrupted supply chains due to tensions in the Red Sea, Tesla loses top position as world's largest EV manufacturer, and 76 countries will see elections taking place this year.

As tensions mount in the Red Sea, business are facing the prospect of supply chains being further disrupted as some ships divert away from the Bab al-Mandab strait. As we looked at yesterday, the narrow stretch between the Red Sea and the Gulf of Aden acts as a pinch point to global commerce with around 12% of global shipping passes through it.

However, following recent attacks on cargo vessels from Houthi rebels, juggernauts in the shipping industry such as the Mediterranean Shipping Company, Hapag-Lloyd, and Maersk have diverted ships away from the Red Sea and Bab al-Mandab strait. Instead, ships will head around the Cape of Good Hope travelling some 25,000km as opposed to 18,520km. Accordingly, the average ultra large container vessel will take an extra 9 days to travel from ports in Taiwan, Shanghai and Beijing to Rotterdam. These longer journeys, coupled with the increased cost of insurance have further exacerbated the cost of shipping. Indeed, in the last week of 2023, freight prices rose 80% on the Shanghai Containerised Freight Index as the benchmark index rose to its highest level in 15 months.

The increased attacks in the Red Sea have acted as the catalyst for many western players including the US, UK and France to deploy navel vessels to the region to protect shipping lanes. However, the news that Iran is also deploying a naval vessel has raised security fears over the stretch.

As politicians and businesses owners around the world keep a firm eye on developments in the Red Sea, rising geopolitical tensions helped feed into risk-off sentiments yesterday, which underpinned financial markets yesterday. Such sentiments – along with markets downwardly revising Fed rate cuts expectations – saw the DXY dollar index rise 0.8% during yesterday’s session as investors looked towards safe-haven assets. This resulted in stock markets around the world coming under pressure as yields on US T-notes appreciated. As such, all eyes are on the Red Sea to see how the international community navigates through increasingly choppy waters.

BYD in the Fast Lane as it Overtakes Telsa in EV Manufacturing

In the automotive world, Tesla has lost the top spot as the world’s largest EV manufacturer to China’s BYD, despite growing sales in the last quarter of 2023 by 20% compared to a year before. BYD is benefitting massively from such an integrated supply chain – where the cars can almost go from lithium, iron ore and sand to a finished product within a few-mile radius – which is a huge benefit when you’re trying to control your costs and make a margin in a competitive space.

It won’t only be Tesla that’s feeling the pain of China entering a market, European auto manufacturers were already trying to play catch up with Tesla and have perhaps been further disadvantaged in the last 18 months with European energy prices being so volatile and emissions targets perhaps being more of an issue in Europe than China. Germany ended its EV subsidies abruptly at the end of last year, which was worth up to €4,500 for consumers and €2,250 for the manufacturer, which is a double blow as the consumer might be forced to look for cheaper alternatives and the manufacturer instantly loses a couple of percentage points of government gifted profit margin.

Election Year

Elections are set to take place in 76 countries around the world this year, with their outcomes crucial in charting the socio, economic and political course of the international community for years to come. Indeed, of the ten most populous countries in the world, eight will hold elections this year, namely: Bangladesh, Brazil, India, Indonesia, Mexico, Pakistan, Russia and the US. Other important elections which could have a considerable impact further afield include the Presidential election in Ukraine, as the conflict in Europe shows no sign of letting up as it enters its third year.

While it’s important to note that many of these elections will neither be free nor fair – and may therefore do little or nothing to change incumbent governments’ grip on power or the political status quo – according to EIU’s Democracy Index 43 counties will see free and fair elections. As such, the electorate from across a vast number of body politics could well change political trajectories around the world, which in turn could impact trading relationships and global commerce. With markets adverse to uncertainty around elections, investors around the world will be keeping a close eye on developments around the world as people head to the polls. Not least will be the US election, with its result likely being pivotal in shaping issues from the war in Ukraine, to Israel-Gaza and trading in the Pacific.

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