Opinions

Amongst the many balls which Trump keeps on throwing in the air, the recent one on Greenland is almost about to rupture NATO itself. Trump's confidence is high after recent strikes in Venezuela and last year's tactical strikes on Iran. So he is very serious about his intentions on Greenland. But this is a direct challenge to EU as Greenland is a semi-autonomous, overseas country and territory of the EU that is associated with the European Union through Denmark though officially not a part of the EU. We see three reasons for Trump's fascination with Greenland. 1) Security 2) Significant Commercial Potential 3) Transformative impact of Arctic shipping routes. On security itself, US military presence in Greenland has declined greatly since the Cold War. There is expanding military and economic competition in the region, and Trump appears keen to pre-empt and deny rivals (e.g. Russia and China) access to strategic footholds, both geographically but also in critical sectors. Russia’s military deployment remains the largest by any Arctic state, with over 40 bases restored since 2014, extensive air defence and coastal forces. China too has sought to grow its influence in the region as a “near Arctic” state through its 2018 Polar Silk Road. China has launched research expeditions and invested in infrastructure and natural resources. On commercial potential, Greenland sits on an estimated 1.5 million tonnes of rare earth minerals in addition to other key minerals, making it a potential linchpin for technology and clean energy industries. Greenland also has significant undiscovered conventional oil and gas potential, possibly billions of barrels of oil equivalent. On the Arctic shipping route, global warming may create transformative opportunities for shipping as Arctic Sea routes become increasingly navigable. Some studies suggest the first ice-free days could occur as early as 2027-2030 along some Arctic routes and multiple climate model projects assess that the Arctic’s major northern sea routes will become reliably navigable during late summer by 2045-2060. We see 4 scenarios by which current issue can unfold. Scenario 1: Deal to offer Trump a win on key interests (with no constraints on Greenland/Denmark sovereignty). Scenario 2: A Long-Term Strategic Lease (lesser constraints on Greenland sovereignty) In a manner similar to US strategic facilities at Guantanamo Bay and Diego Garcia, the US could seek a similar long-term presence in Greenland. Scenario 3: Compact of Free Association: In this scenario, Greenland could pursue some sort of Compact of Free Association (similar to what the US has with the Federated States of Micronesia, the Marshall Islands or Palau. Scenario 4: Military Engagement: White House officials have stated that military options remain on the table if Greenland cannot be acquired peacefully. This scenario means the end of NATO as we know currently. Our own view is that the 1951 agreement between Denmark and the US already allows the US to increase its military presence in the territory (which it has scaled back to just 200 personnel currently from almost 50 bases and radar stations and 10,000 personnel at its peak). Official negotiations would be required for the ramp-up of US military personnel and hardware on the island, or the establishment of new bases. However, Denmark’s government (along with the EU) could send a clear signal that it would accommodate an increased US military presence. Denmark could go further by offering the US the right of refusal for third parties, such as Russia and China, to establish military or commercial interests in the territory. This could further placate Trump if his ambitions are primarily related to Greenland’s abundant natural resources especially if it were combined with an offer of increased access for US companies interested in mineral exploration and extraction. But this can also be used in military terms via a concept called "Trojan Horse Takeover". In this the US uses the 1951 defence agreement with Greenland to deploy additional troops, but the US troops deviate from their routine activities and take control of government functions and institutions. This scenario would have the same consequences as an overt military takeover including the collapse of the transatlantic relationship, including NATO. In the end only Trump knows how he will catch this ball.

Iran is currently experiencing the largest civil unrest since the 2022 “Woman, Life, Freedom” uprising. The regime is the weakest it has ever been: Its proxies, from Hezbollah to the Assad regime in Syria, lie shattered across the Middle East. There is no effective Chinese or Russian support behind the current Khamenei regime. The current civil unrest started after a budget bill presented in Iranian Parliament in which the government proposed removing the preferential exchange rate (285,000 rials to the U.S. dollar). Many middle class sections including business class suspected that without a credible, transparent replacement—would immediately raise prices for basic goods. That mix of rage at corruption and anxiety about inflation turned the debate over the exchange rate into a trigger for protest. The sharp rise in the exchange rate has effectively broken normal price-setting. The Iranian Rial is now quoting at 1.47 Million Rials for a dollar. Back in 2022, it was trading at 430,000 Rials to a dollar. The rapid depreciation is compounding inflationary pressure, pushing up prices of food and other daily necessities and further straining household budgets, a trend that could worsen by a gasoline price change introduced in recent days. inflation rate in December rose to 42.2% from the same period last year, and is 1.8% higher than in November. Foodstuff prices rose 72% and health and medical items were up 50% from December last year. This has led to businessman too joining bazaar strikes that have raised the hopes of anti-regime activists, as the bazaar played a crucial role in the 1979 overthrow of the shah. Alarmingly for the regime, truck drivers, students, and everyday Iranians have also joined the strikes, expanding the coalition regime. On the external front, Russia/China “patron” myth is weaker than Tehran hoped. U.S. President Donald Trump has delivered more than one warning to Iran about cracking down on the anti-regime protests. His comments may well have emboldened protesters who have long campaigned for an end to the Islamic regime, even if many don’t believe Washington has their best interests at heart. To summarise, this is the first major protest movement in the aftermath of Iran losing the June war. That loss demystified and humbled the regime undercutting its narrative that the people “stood with” it. Iran looks more vulnerable now than at any time since the early revolutionary period. There’s no redemptive storyline left for the regime (economy, proxies degraded, nuclear program damaged, sanctions, mismanagement, water crisis, legitimacy loss). Anger is abundant in Iran, only coordination is required. That is the only stumbling block before the current regime topples. From a market perspective, Iran civil unrest has introduced $3-4/barrel risk premium in the crude prices. Repeated threats from Trump about the potential implications of a forceful suppression of protests have raised the spectre of a potential miscalculation that could lead to a material escalation in Middle East tensions. In short term, most of the plausible outcomes of a change in leadership/regime imply heightened risk of both domestic and regional destabilization. But our own view is that Trump might not be needed to even intervene. Either the civil unrest itself will explode leading to a regime change with a moderate cleric face or Israel might push the stone over the cliff by attacking once again the key personnel of current regime helping the civil unrest. Hence in medium term, this implies a US friendly leadership change and less sanctions and more crude supply.

US strikes, the capture of President Nicolas Maduro and the US intention to govern Venezuela until a transition takes place implies a long-term agenda on Venezuelan crude exploration & exploration by current US administration. The side results might be a transition to a democratic government as well as economic recovery. In fact we see another side plot developing in the current Venezuelan set of events. We now see a higher probability of US trying to take out current regime in Iran as it now has an alternate source of crude coming up soon. Iran’s current regime’s largest bargaining chip was that it could spoil the middle east crude supply chain and pull crude prices up when Trump administration wants prices to cool down. We have the all crucial 2026 US election on 3rd Nov for all the 435 districts in the US House of representatives & 33 seats in Senate. Trump needs to bring crude prices further down to soften the tariff impact on US consumers. Additionally, it might help in his rate cut demand from Fed. Hence, we now see a strong probability of a US strike enabling change in current Iranian regime which is anyways facing domestic pressure due to rampant inflation and economic turmoil. Iran’s current crude exports are 1.8mbpd which can easily go up to 3 mbpd if sanctions get removed in a new regime as Iran produces almost 4.3 mbpd. So, the combined impact of Venezuela and Iranian supply means 2.5-3 mbpd increase in global crude supply which implies a 10% correction in crude prices in medium term. Hence, we continue to believe Brent is headed towards $50 levels by Q3CY26. On Venezuela itself, we believe it could return to producing about 2.5 million barrels a day in coming years its pre-implosion level up from less than 1 million currently. While Venezuela has some of the world’s largest oil reserves, its role as a player in global markets has significantly declined since 2015. It currently produces around a million barrels a day, about one-third of its 1990s peak and less than 1% of global output. Most of Venezuela’s oil goes to China. Crude production in Venezuela has plunged more than 70% since its peak in the late 1990s, when it pumped more than 3.2 million barrels a day. A recovery in Venezuela’s oil supply to pre-implosion levels would add 1.5 million barrels a day to global output over time and lower prices by about 6-7%. With global output at about 100 million bpd, that would imply a 1.5% increase, adding to an expected glut. We estimate a 1% change in global oil supply moves oil prices in the opposite direction by about 4%. This implies a 1.5% increase in oil supply could result in a close to 6% decline in prices by the time the recovery is complete, all other things being equal.

Quantum computing is an idea whose time has come. It would be radically new and fundamentally different from the classical computers we're used to. Quantum computers use microscopic objects or other extraordinarily tiny entities including light to process information. These tiny things don't follow the classical laws that govern the rest of the macroscopic universe. Instead, they follow the laws of quantum physics. Quantum computers harness the unique behaviour of quantum physics such as superposition, entanglement, and quantum interference and apply it to computing. This introduces new concepts to traditional programming methods. Quantum computers use tiny circuits to perform calculations, as do traditional computers. But they make these calculations in parallel, rather than sequentially, which is what makes them so fast. Regular computers process information in units called bits, which can represent one of two possible states, 0 or 1 that correspond to whether a portion of the computer chip called a logic gate is open or closed. Before a traditional computer moves on to process the next piece of information, it must have assigned the previous piece a value. By contrast, thanks to the “probabilistic” nature of quantum mechanics, the qubits in quantum computers don’t have to be assigned a value until the computer has finished the whole calculation. A quantum computer with 4 qubits can in theory handle 16 times as much information as an equally-sized conventional computer and will keep doubling in power with every qubit that’s added. That’s why a quantum computer can process exponentially more information than a classic computer. Quantum computers work on Qubits. The current record for qubits connected in commercially available quantum computers is 1,180, achieved by California startup Atom Computing in October 2023 more than double the previous record of 433, set by IBM in November 2022. The race for quantum advantage and fault-tolerant quantum computing is accelerating. In the next 12-24 months we expect to see demonstration of quantum superiority over classical systems on useful problems. By 2029/2030, the industry's ability to progress on chip scalability, algorithm development and quantum-classical integration will dictate commerciality timelines of useful systems. While there are many applications in material sciences, weather forecasting, drug discovery, optimisation solutions, the two most critical areas of impact are in cybersecurity and AI training. If by 2030 a 100k qubit stable solution is achieved, current crypto currencies will loose all their value as quantum computing will be able to compromise their keys. Not only cryptos but also most of the current industry security networks. Quantum computing will also make redundant the need for large data centers and reduce energy needs for AI learning. For e.g. it is generally more efficient to use ~100 qubits than it is to use ~10^18 classical bits. Another potential opportunity is the ability of QPUs to train models with much smaller data sets, particularly in cases where data scarcity prevents AI models from presenting good results. Summary: Niels Bohr once said “Those who are not shocked when they first come across quantum theory cannot possibly have understood it.” We believe quantum computing might change the world faster than the combined impact of telecom revolution in 2000s and the AI burst currently. The development curve in Quantum Computing will be far sharper than what we are seeing in AI and the impact far more wide spread. The only technical challenge remaining in this journey is how to scale the number of stable & error free physical qubits (which sit on the quantum chip) to be able to produce error-corrected logical qubits. Once the industry is able to solve this problem statement, we might be looking at answers to many unresolved questions till date in human history. Simultaneously it will pose many questions to current asset valuations such as crypto and AI led names.

Chinese leaders have repeatedly shown patterns to think ahead over the last 5 decades. Think 1980's industrialization. Think the 2010's manufacturing explosion. We believe China is in the middle of a strategically decoupling process from US. And this is irreversible. Chinese policy makers are fully aware of the AI potential in next few years. They also know US is ahead in the race for now. But China does not want this to be used as a leverage against them by US. Hence China is pursuing self-reliance in AI at every level of technology. While China’s government has long identified AI capabilities as a critical goal, it employs different strategies to aid each layer. The heaviest state support is reserved for the capital-intensive semiconductor sector. Indigenization efforts for software frameworks are entrusted to Big Tech companies. Higher layers, i.e., AI models and applications, benefit from an enabling environment but receive less direct state support. The real strength of Chinese AI space is it's open source nature. China also does not follow the shock and awe policy of announcing large AI capex and data centers. They like the “build it and they will come” way. Chinese decoupling from US in AI is strategic in nature. Both countries are aggressively building mutually exclusive AI ecosystems, as a long-term strategic effort rather than a short-term tactical move. China aims to eliminate all US-origin dependencies in its AI and semiconductor supply chain, building a fully indigenous ecosystem that cannot be disrupted in a crisis. In pursuit of this, Chinese policymakers increasingly prioritize security and strategic resilience over AI performance, accepting near-term efficiency losses as the price of long-term autonomy. All of above leads us to our hypothesis that Chinese long held ambition of unifying Taiwan with mainland is nearing action point. In the 24th Nov call with Trump, Xi focussed on Taiwan while Trump focussed on trade & agriculture. Xi reinforced the point that some kind of compromise over Taiwan is a structural component of creating and maintaining US–China strategic equilibrium, rather than merely a regional issue. He did this on the call by stressing China’s “core interests” and the historical legitimacy of China’s claim. We believe one way or the other, China might look to annex Taiwan by 2027. Either it will come as a part of a large deal with US with Taiwan against Trade & Tech, or plain military action. China is completely prepared for both of the above options seeing the rapid decoupling from US in recent times, specially in the AI field. They don’t want any leverage against them to be there when they act in 2027.

In this week’s budget (Wednesday, 26 November at 12:30 pm), UK Chancellor Reeves looks set to fill a fiscal hole of around £20bn avoiding politically sensitive income/other tax rates that Labour ruled out in its manifesto. We can expect a further £5-10bn of tax rises to raise headroom. The total fiscal tightening should be just shy of 1% of GDP at the point the fiscal rules need to be met (2029-30). We see extra gilt issuance of around £6bn in the current fiscal year (£305bn). Assuming a fiscal hole of £20bn does not include adjustments to the fiscal headroom, then we expect a net fiscal tightening of between £25bn and £30bn to incorporate a rise in the headroom by £5-10bn from its previous £9.9bn. For the purposes of the macro-outlook, two things matter most in this budget: First, the size of the fiscal gap that has opened up, plus any changes that the Chancellor makes to the headroom around her fiscal rules as the sum of these indicates how much net fiscal tightening must be implemented. Second, how the fiscal tightening is distributed over the years of the forecast. While a more front-loaded fiscal tightening and a larger fiscal gap to fill would have even more significant repercussions for the macro -outlook, we still think a more modest backloaded tightening will be sufficient to keep the pressure on the Bank of England to cut interest rates further, and expect 25bp rate cuts each in December and April. To the extent that i) some fiscal measures will likely aim to reduce inflation, and ii) this inflation reduction pulls down on inflation expectations, there may be downside risks to market’s current terminal rate view of 3.35%. On incremental gilt issuance, assuming no major policy changes prior to the start of the next fiscal year (2026-27), we assume the miss on the deficit will show up in an additional financing need of £6bn, i.e. £305bn total for the year versus £299.1bn previously. The Bloomberg consensus expects £9bn higher gilt issuance in 2025-26 (i.e. to just over £308bn). We remain bullish on UK 10yr Gilts as we have written in our opinion piece & trade recommendation pieces written on 15th Nov & 16th Nov. Following was our trade recommendation on 16th Nov: BUY 10 YEAR UK GILTS (YIELD 4.58), TP 4.20 & SL 4.80.