It has been another week where we have witnessed significant geopolitical shifts, with the surprising and rapid demise of the Assad regime in Syria
The impact on financial markets was limited to a slight shift higher in oil and gold prices, reflecting yet more uncertainty in a region that has been extremely volatile over the past year.
Sunday saw Syrian President Bashar al-Assad resign and flee the country after the stunning recent offensive by rebels reached the capital city of Damascus. Assad was offered asylum in Russia, a long-time backer of his regime. The Assad dynasty has ruled Syria for 50 years but had been fighting a civil war since 2011, which had largely been in a frozen state in the past few years. The offensive led by the Hayat Tahrir al-Sham (HTS) group which began on 27 November appears to have benefitted from both Russia and Iran, who have been key supporters of Assad, having their focuses and resources elsewhere. HTS were once affiliated with al-Queda but have distanced themselves in recent years.
The HTS offensive began in the north west of Syria before rapidly sweeping through major cities and to the capital city Damascus against a backdrop of the military collapsing. Given the civil war had been in something of a stalemate, the speed of the advance of the rebels and fall of the Assad regime has caught everyone by surprise. The attack comes at a time when Syria’s main backers, Iran and Russia, are weakened or distracted, and it leaves their strategy in the Middle East in tatters. The move leaves Russia weakened in the region, having used Syria for port access to the Mediterranean, while Iran had used Syria for many years as a conduit to Hezbollah in Lebanon. Israel has taken the change in regime as an opportunity to suppress Syrian military capabilities including chemical weapons sites, while the US has also attacked what it believes to be terrorist sites.
The rapid demise of the old regime poses yet more risks to the region’s stability with the removal of the Assad regime, much like we saw after Colonel Gaddafi was toppled in Libya, leaving risks of a power vacuum. However, the alliance of rebel forces led by HTS appears to be seeking reconciliation between all forces opposed to Assad and a smooth transition. The rapid appointment of a transitional government, set to be in office until next March has calmed some concerns for now. The new Prime Minister, Mohammed al-Bashir, said it is time for people to enjoy “stability and calm”. The US has said it will recognise and support a future government so long as it emerges from a credible and inclusive process.
The main economic data has come from the USA, with updated employment and inflation numbers. The US non-farm payrolls data bounced back from the weak October update, which was negatively impacted by hurricanes and also by the Boeing strike, which is now resolved. The US saw 227,000 jobs created in November, but the unemployment rate continued its very gradual climb higher, to 4.25%. The US inflation data also climbed higher, to 2.7% year on year, in line with expectations. Core inflation was 3.3% year on year. While inflation levels remain above the Federal Reserve’s target, there remains scope for a rate cut next week and with the data in line with expectations, markets are still pricing an extremely high probability (99%!) that the Federal Reserve will cut interest rates by 25 basis points next Wednesday. The guidance from the Fed next week will be an important catalyst to maintain a festive mood in markets not least because the consistent strength of the US economy, as recently noted by Fed chair Jay Powell, may mean the Fed can slow the pace of rate cuts in 2025 because the US economy remains in such good shape.
The European Central Bank met yesterday and cut interest rates by 25 basis points to 3.0% as expected. The accompanying statement tilted slightly more dovish, dropping language on keeping policy “sufficiently restrictive” to get inflation back to target. The bank now forecasts 2025 growth for the eurozone of only 1.1% compared to their previous forecast of 1.3%. They expect inflation at 2.1% in 2025 and 1.9% in 2026. ECB President Christine Lagarde suggested a clear majority supported a 25 basis point rate cut though some members preferred a larger move. Lagarde said inflation risks were “two sided” but gave little away on expectations for cuts in 2025, emphasising “data dependency”. The next ECB meeting will be in late January, after President Trump’s inauguration. A continued gradual approach to rate cuts is likely assuming no nasty Executive Orders from the White House in Trump’s first days in office.
In terms of the political dramas from last week, there remains plenty of uncertainty in both France and South Korea. The South Korean President Yoon Suk Yeol narrowly survived an impeachment vote last weekend, though is still being investigated for treason. The vote fell just five votes short of the threshold for impeachment, with many members of the ruling party boycotting the vote. Ahead of the vote, the President apologised for attempting to impose martial law, a move he said had been made out of “desperation” and pledged not to make another move. He did not offer to resign but said he would leave decisions on how to stabilise the country to his party.
President Macron told French political leaders earlier in the week that he will appoint a new Prime Minister in “the next 48 hours”. That deadline has now passed but an announcement is expected today, in which case the rest of this paragraph may be very much out of date! Bloomberg reported that Macron is trying to build a coalition of moderates to last until the end of his Presidential term in 2027. Macron met with all the major parties with the exception of Marine Le Pen’s National Rally and the far-left party of Jean Luc Melenchon. Macron’s office said the President is “willing to work with all political parties who have indicated that they are willing to compromise”. Without the support of the far left and right parties, the same problems remain in terms of Parliamentary numbers, however.
The past couple of days have seen the Central Economic Work Conference taking place in China. This event usually sets the path for economic policy for the subsequent year. There was heightened anticipation ahead of the event as a result of the Politburo meeting on Monday that indicated shifts in both fiscal and monetary policy. The Politburo, which comprises the Chinese Communist Party’s most senior officials, shifted their stance on monetary policy to “moderately loose” from the “prudent” stance that has been in place since 2011. There have only been five shifts in the official language on monetary policy in the past thirty years, so this is a notable move. The Politburo also pledged “extraordinary counter-cyclical” policies and said they would implement a “more proactive” fiscal policy, pointing to greater easing ahead, and promised to boost consumption and stabilise the housing sector and stock market. The market reaction to the news on monetary policy was fairly circumspect, given that we are yet to see concrete details on wide scale stimulus, and other than market grabbing headlines on potential wider scale measures that we have seen over recent months there has to date not been actual shifts in monetary or fiscal policy, nor have we seen significant measures to underpin the property market, whose weakness is a considerable factor in continued soft consumer sentiment and spending. The conference concluded today with a pledge of lower interest rates and “vigorous” efforts to boost domestic consumption but once again, no detail on actual policy. The spectre of further tariffs from the US on the horizon may begin to focus minds in Beijing on actual policy implementation rather than supportive soundbites.
Source: Columbia Threadneedle Investments as at 13 December 2024
