Echoes of the Great War: Geopolitical Realities Today

Iran’s unprecedented attack on Israel over the weekend was more grim evidence that we are close to an inevitable conflict with higher proportions. The war in Ukraine and the conflict between Israel and Palestine in the Middle East – further complicated by Houthi missile attacks on ships in the Red Sea – contribute to the overall atmosphere of instability and rivalry among global powers.

To warm up this discussion, I recently heard a very interesting point from a professor at Columbia University that the current geopolitical and economic environment has some similarities to the period preceding World War I:

Rising great power competition: Like in the early 20th century, there is a resurgence of competition among major powers for influence, resources, and strategic dominance. Today, this competition is evident between the United States, China, and Russia, reminiscent of the rivalry between European powers before World War I.

Nationalism and populism: Both periods have seen a resurgence of nationalism and populism in various parts of the world, leading to domestic political upheavals and sometimes contributing to international tensions.

Trade tensions and economic rivalries: Just as before World War I, there are trade tensions and economic rivalries among nations, with disputes over tariffs, trade imbalances, and economic dominance shaping global relations.

Several bellic conflicts: Balkan Wars (1912-1913), Moroccan Crises (1905 and 1911), Assassination of Archduke Franz Ferdinand (1914).

Arms race and military build-up: In the years leading up to World War I, there was a significant arms race among European powers, particularly between Germany and Britain. This competition for military superiority contributed to the overall tension and preparedness for conflict. If we analyze the European Union today, Emmanuel Macron has been vocal in agitating for more military aid and pushing to ramp up military expenditure.

This is a very interesting view of the geopolitical situation, and if it indeed materializes, it could have a significant negative impact on the Brazilian Real and global interest rates. Yesterday, we've already seen the BRL jumping to R$5.20, and the Brazilian swap curve not even fully pricing in the 50-basis-point rate cut telegraphed by the Central Bank of Brazil for May.

At the same time, this morning, China reported economic growth for the first quarter that exceeded expectations, signaling potential challenges ahead for the remainder of the year. Gross domestic product (GDP) increased by 5.3% during the period, showing a slight acceleration from the previous quarter and surpassing estimates. However, a significant portion of this growth occurred in the first two months of the year. In March, there was a notable decline in retail sales growth, and industrial output fell short of forecasts, indicating looming challenges. Investors may struggle to fully trust the robust GDP growth figures in light of the mixed data from March. China, as the world's second-largest economy, continues to grapple with finding stable ground in the aftermath of the pandemic.

Even though the market always anticipates and exacerbates these factors, leading to an overall sense of unease or nervousness, these geopolitical risks are important stimuli for organizations to hedge their foreign exchange exposures. The elegance of risk management lies in its capacity to help you sleep well in the evenings.

Have a good week ahead.

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