Deutsche Bank – CIO Insights September, 2023

The September 2023 edition of CIO Insights by Deutsche Bank highlights key geopolitical issues that are impacting the global economy. The US administration has imposed additional export and investment restrictions on China and certain Middle Eastern countries for specific semiconductor products and equipment. These restrictions have negatively affected the export prospects of Western producers. However, China might be able to bypass some of these sanctions due to its advancements in high-end semiconductors. In retaliation, China has imposed restrictions on its exports of critical raw materials, which has increased price pressure on Western companies. The BRICS countries have decided to admit six new members, which will increase the diversity of the group and enhance the political and global trading influence of these emerging market economies. The upcoming Taiwanese elections in January 2024 will also have implications for relations between China and the US, necessitating close monitoring. Food prices have risen due to the non-renewal of the Russia-Ukraine grain export agreement and climate-related events such as severe droughts and flooding. These factors have particularly affected emerging market economies. India, the largest rice exporter in the world, has implemented export restrictions, further exacerbating the pressure on food prices. Low water levels caused by droughts have also reduced hydro power generation globally, leading to increased consumption of fossil fuels for energy generation. Additionally, OPEC+ has decided to cut its output until the end of the year, contributing to higher energy prices. Central bank tightening measures have started to slow down the growth of some developed economies, but sticky core inflation may result in interest rates being kept higher for a longer period. While defaults in Asian debt markets have been a concern for over a year, default rates in Europe reached their highest levels in the last three years, although they improved in the US in August. Refinancing conditions are deteriorating, which could lead to further increases in default rates. The supply of US Treasuries is another factor impacting bond markets as investors try to anticipate the financing requirements of the US government following delays caused by the prolonged debt ceiling discussions earlier this year. The share of debt issued as short-dated T-Bills was higher than expected, leading to uncertainty about whether they will be rolled over to longer-dated T-Bonds, which could contribute to market volatility.