MARKET PERSPECTIVE

By: J Mulraj

Feb 8-14, 2014

And it has begun!

Image created by Bing

The ongoing trade war, between USA and China, is reminiscent of the scene in one of the Rocky movies, in which both boxers knock each other out. That’s what Trump and Xi may end up doing to each other! Global trade constitutes a whopping 58% of global GDP, and a sharp fall in trade due to the tariff war would lower global GDP growth, hence stock markets.

Trump is concerned about the vast quantities of fentanyl being illegally smuggled into USA via its northern border with Canada and its Southern border with Mexico. Several of the precursors to make it come from China and can be sent by mail to both neighboring countries, converted to fentanyl there, and illegally smuggled into USA. Fentanyl has caused  75000 deaths in America. It would have been more had the US Customs and Border Patrol not seized 21000 pounds of fentanyl, a quantity large enough to kill 4 b. people! This is alarming enough to warrant the higher tariff threat.

Trump imposed a 25% tariff on all imports from Canada and Mexico, and 10% on China, to pressure both neighbors to act to stop fentanyl pass through their border with USA. The pressure worked, as trade accounts for 67% of Canadian GDP and 73% of Mexico’s. Both neighbors promised to provide 10000 military personnel at the border to stanch the flow of fentanyl.

Trump has now imposed a 25% import tariff on import of steel and aluminum into USA, applicable to all countries. China is the world’s largest producer of both steel (capacity over 1 b. tonnes per year) and aluminum (capacity over 400 m. tpa).

In retaliation, China opened up an anti-trust investigation into American Google, a 15% import tariff on American coal and LNG imports and 10% on crude oil, farm equipment and others.

The US has a $ 250 b deficit in goods and services with China.

There were several encouraging developments in India last week.

A large oil discovery was made in upper Brahmaputra, the 7th longest river in India, located in Assam. Oil had been discovered in lower Brahmaputra earlier, so it suggests a reservoir beneath the river. Oil India is trying to extract this using technologies, without drilling and affecting the flow of this important river.

In oil exploration, ONGC has tied up with BP, UK, to provide it with technical assistance to boost production in its Bombay High offshore oilfield. BP has assured a 60% boost in oil production. At the recent Trump-Modi summit in Washington, India has also pledged to buy more US oil in a bid to balance trade. India has a trade surplus. India will also purchase more military hardware, perhaps, eventually the F35 stealth aircraft.

Besides this, PM Modi signed a deal with President Macron of France, under which both countries would jointly develop and produce small modular reactors (SMRs) to supply enough nuclear power to meet the growing need for it, from AI.

In defense, Bharat Electronics and French Safran have agreed to set up a manufacturing unit to produce the Hammer all weather  air to surface missile system. Adani Defense together with DRDO will manufacture vehicle mounted counter drone system. Unmanned drones will be the future of warfare, and will become so accurate they will endanger ground troops.

India has also mastered the scramjet technology that is used for hypersonic missiles. A hypersonic missile is so fast it can travel from US to China, a distance of 12000 kms, in just 19 minutes.

In global developments, after Hamas stated that it would not release a further 3 Israeli hostages, as agreed in Phase 1 of the ceasefire, Israeli PM Netanyahu threatened to resume the war after setting a Saturday deadline for the same. Fortunately, after pressure from Trump and intervention by peacemakers Egypt and Qatar, Hamas has agreed to release three hostages. So, for now, the ceasefire holds. One hopes the next phase of the agreement goes through.

Re the Ukraine war, Trump is to meet with Putin in Saudi Arabia to try and arrange a cessation of mindless hostilities. The US has also told Zelensky that it is unrealistic for him to expect to hold on to all territory. Ukraine has been devastated as a society; it’s young men have been killed, injured or migrated. As a result the country’s fertility rate is 1.4, well below the 2.1 rate required to sustain a population. So it becomes imperative for Zelensky not to continue a senseless war and lose more of its young men. Trump has also stated that Ukraine should not look to becoming a member of NATO, but that other arrangements will be made to ensure its territorial integrity.

It appears that a ceasefire in the Russia- Ukraine war may be worked out. Perhaps Russia may also resume energy supply to Europe. European economies have been badly hit without cheap Russian energy, and ought to become convinced, in their own self interest, to agree. A resumption of Russian energy supply to Europe would also serve to weaken the Russo-Chinese economic umbilical cord.

Last week the BSE Sensex closed at 75939, for a weekly loss of 1921 points.

In the coming weeks, the ability of President Trump to achieve a negotiated settlement of the Russia-Ukraine war, and to use his unique ways to ensure the continuation of the Israel-Hamas conflict, will help stock markets retain their peaks.

Wouldn’t it be nice if the global got together and sang ‘Imagine’?

Comments may be sent to jmulraj@asiaconverge.com