Beware the Geopolitical trade: An evergreen trade risk to be remembered

The horrible events that we’re currently seeing in the Middle East can sometimes create an unwanted attraction for traders. Chasing short, sharp swings in things like oil and other commodities of this ilk, might appear attractive for the here and now upside opportunity but be aware geopolitical trading always ends in bad outcomes.

This is why we want to point out in this article the avenues you could consider with geopolitical risk in the Middle East. These include impacts on things such as shipping, auto industries, consumer and retail goods, soft commodities etc.

While we highlight this is because it gives you more time and a better fundamental understanding of the structural impacts that could positively and negatively impact these industries. Trying to predict actions and reactions of geopolitical outcomes will always lead to bad trades.

Backgrounding

Biggest playbook from a trade perspective in the Middle East is what happens to the Red Sea And by extension the Suez Canal. The impact the Suez Canal has on global supply is astounding. 30% of global container traffic travels through this straight and into the disputed area of the Red Sea. It is an essential artillery for international trade, particularly economic centres of Europe, Asia and North America. Possible disruptions to the supply chain could lead to widespread logistical challenges particularly those that rely on the minute delivery time systems.

We have already seen examples of what may happen now at the start of the year. In late January early February the Red Sea was the centre of attacks by Houthi rebels on cargo ships and tankers, creating major disruptions in global maritime trade. 

The resultant behaviour or global logistics was to send hundreds of vessels around the significantly longer Cape of Good Hope route southern, adding approximately 6,500 kilometres to their journeys. 

This detour led to inflated transit times, freight costs, and caused supply chain bottlenecks leading to a re-inflation issue worldwide. 

Before we play that out in the current environment, inflated transit times heightened freight costs supply chain bottlenecks coupled with interest rate cuts and central banks trying to reignite economies – could we be looking at interest rate hikes to offset this in 2025?

Does it also lead to higher levels of spoilage waste and poor products that demand lower pricing despite lower goods? These are all questions that need to be considered and questions that give traders time to position a manoeuvre in What is normally a rapidly changing trading environment.

Here’s a detailed look at how this crisis could affect global supply chains, shipping costs, and inflationary pressures.

Automotive Industry: 

The global auto industry would be among the hardest hit by a Red Sea crisis. European auto manufacturers, which rely heavily on parts sourced from Asia, announced temporary production halts at the start of the year when the Red Sea was closed. The European market is particularly dependent on Chinese exports of new-energy vehicles (NEVs), which are primarily shipped by sea, and the extended shipping times could have serious consequences for auto production schedules, vehicle availability, and pricing.

Further stressing the resilience of the automotive supply chain, especially if these delays come on top of existing disruptions in global semiconductor supply — a key component for both conventional and electric vehicles. Suppliers, particularly those with significant revenue exposure from China to Europe and the U.S., will feel the impact of extended lead times and will lead to share price impacts.

Consumer Goods

Retailers both in Europe and Asia rely heavily on sea freight for inventory replenishment. Shipping delays that could disrupt product availability, particularly for time-sensitive items such as seasonal goods are plays traders need to watch. While some large retailers have and will hedge against freight rate increases by locking in shipping rates through the second half of 2024, they are not entirely insulated from further disruptions. If supply chain bottlenecks worsen, they may face difficulties in securing stock, especially for goods sourced from Asia, potentially leading to stock shortages and rising consumer prices in the European and Mediterranean markets.

Manufacturing and Industrial Supply Chains: 

The broader manufacturing sector, including electronics and heavy machinery, is also at risk. Extended shipping times will likely affect lead times for raw materials, intermediate goods, and finished products which in turn leads to slowing production cycles. 

Again, if we use the impacts from February as a baseline example the rerouting of vessels around the Cape of Good Hope saw an increase in transit times by about 30%, translating to a 9% reduction in global shipping capacity. The impacts this time would be of a similar nature. The unknown is the length of time the delays and closures will be in place. Along with the conflict drags on the more bottlenecks it will create.

The reduction in capacity creates ripple effects across various industries, as businesses are forced to manage longer delivery times, increased uncertainty, and higher costs for shipping essential goods. Considering the likes of France, Germany and Italy are major high-end manufacturing players. These the markets traders should be looking at closely along with the impacts trade might have on the currency. Again using February as the example, the EUR fluctuated rapidly during this time as data points released in March through to June showed these three nations and the periphery struggled economically. A similar issue is likely this time around as well.

The final conclusion from the horrible events that we are seeing in the Middle East is again beware of geopolitical trade. We cannot emphasise this enough chasing risk both up and down the momentum trade will lead to undue risk taking and probable loss. The evergreen lesson from these kinds of events is not to look at the ‘now’ but look at what happened previously when these have occurred as the probable outcomes this time around. History never repeats itself, but it does follow a similar pattern.