NUNZIUM

News That Matters

29/01/2024 ---- 05/02/2024

Amid the aftermath of the recent Israel-Hamas war, global attention is now shifting towards the escalating conflict in Yemen. The Red Sea, a strategic maritime route carrying an estimated 12% of global trade, is the latest epicenter of tensions. The United States and Britain have launched strikes against 36 Houthi targets in Yemen in response to attacks on American and international interests by Iran-backed groups. These strikes were executed by US warships and American and British fighter jets and were not limited to one night, one target, or one group.

The Houthi rebels, supported by Iran, have been a significant adversary for the U.S. since the Hamas-Israel conflict began on October 7. This conflict resulted in over 1,200 deaths and about 250 hostages. The Health Ministry in Hamas-ruled Gaza reported more than 26,000 deaths and over 64,400 wounded since the war's inception. The Houthis have been conducting frequent missile or drone attacks against commercial and military ships in the Red Sea and Gulf of Aden.

In response to the escalating tensions, the European Union plans to launch a naval mission, Aspides, on February 19. The mission aims to safeguard commercial shipping in the Red Sea from missile attacks by Houthi rebels in Yemen. The Houthi attacks have caused major shipping companies to opt for longer, costlier routes, leading to shipping delays and temporary production halts in some European factories. These disruptions have triggered concerns of potential inflation in Western economies.

Belgium, France, Germany, Greece, and Italy, five EU member states, have publicly committed to the mission. Unlike the US and UK's Operation Prosperity Guardian, which has bombed multiple Houthi targets, the EU's mission will solely focus on protecting ships and intercepting incoming missiles. The EU's top diplomat, Josep Borrell, assured that the mission's capabilities will be "proportionate to the threat" and will not include any operations on land, only at sea.

Meanwhile, Yemen's Houthi militants attacked an oil tanker, Marlin Luanda, in the Gulf of Aden, causing a fire. The British oil tanker was operated by the commodities group Trafigura. The Houthi militants claimed responsibility for the attack, which they say was in retaliation to the "American-British aggression against Yemen" and in support of the Palestinian people.

The ongoing conflict within Yemen between Houthi forces and a Saudi-backed coalition has led to a humanitarian crisis. The conflict, which began with the Houthi forces taking over the capital Sanaa in 2014, escalated into a wider war in 2015 when a Saudi-led coalition intervened. The United Nations Development Programme reported in 2021 that the conflict has resulted in up to 377,000 deaths, with more than half of those from indirect causes associated with the conflict, such as lack of food, water, and healthcare.

The escalating tensions in the Red Sea carry high stakes for not only the nations directly involved but also for global trade and security. The world watches closely as the ripples of this conflict continue to spread, waiting to see how the situation will unfold.

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In January 2024, a meeting of eurogroup finance ministers was convened in Brussels, graced by European Central Bank (ECB) President Christine Lagarde and Netherland’s Finance Minister Steven Van Weyenberg. The primary focus of the meeting revolved around the topic of interest rates. Despite market speculation of potential rate cuts in March or April, the ECB, led by Lagarde, expressed a commitment to maintain high benchmark rates until inflation returns to the 2% target. This stance is driven by concerns over high borrowing costs and associated risks.

This speculation of rate cuts by central banks, including the ECB and the U.S. Federal Reserve, previously led to a boost in stock market indexes towards the end of 2023. However, the optimism has since been tempered in 2024, with stock prices cooling off due to worries about weak economic growth and geopolitical disruption, including the Israel-Hamas conflict.

The U.S. Federal Reserve, conversely, is expected to initiate a cut in its key rate by mid-2024, as indicated by senior Fed officials. This follows the decision to maintain borrowing costs at a 23-year high on January 31, 2024, with target benchmark interest rates held between 5.25% and 5.5%.

Inflation in Europe, which hit a peak of 10.6% in October 2022, has since fluctuated, rebounding to 2.9% in December from 2.4% in November. This fluctuation is largely attributed to falling energy prices and easing supply chain bottlenecks. The high prices have had a widespread impact, affecting services and wages across the economy.

The economy of the 20 European Union member countries that use the euro currency saw a marginal contraction of 0.1% in the July-September quarter. This sluggish growth coupled with the impact of higher interest rates has sparked further speculation about potential rate cuts. The ECB's meeting on January 25 was expected to provide significant insights into the timing of these potential cuts.

In the U.S., inflation rose to 3.4% in December 2023, up from 3.1% in November, exceeding the 2% inflation target set by central banks, including the Bank of England and the ECB. The Bank of England Bank Rate has remained steady at 5.25% since August of the previous year, while the ECB has kept its main refinancing rate at an all-time high of 4.5%.

Speculation was rife that the Fed would announce its first interest rate cut since 2019 at its March FOMC meeting. However, stronger than expected economic data has led to a recalibration of these expectations, with the current probability of a March rate cut dropping to 49% from a previous 80%.

Goldman Sachs economist David Mericle has suggested that the Federal Reserve should cut interest rates in March due to potential risks to the labor market. Despite the labor market's current robustness, there are growing concerns of potential job losses as corporate layoffs have seen an uptick in recent weeks.

In summary, central banks worldwide continue to grapple with the delicate balance of controlling inflation while promoting economic growth. The effectiveness of their strategies will become clearer in the coming months.

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