Ironclad

US President Joe Biden recently warned China that the US will defend the Philippines in case of any attack in the disputed South China Sea. He said ‘I want to be clear – I want to be very clear: The United States’ defence commitment to the Philippines is ironclad.’  Biden added, “Any attack on the Filipino aircraft, vessels, or armed forces will invoke our Mutual Defence Treaty with the Philippines.” China responded by saying that the US had ‘no right to get involved in a problem between China and the Philippines.’ Manila is contesting China’s claims to parts of the South China Sea, which has recently seen two collisions between Filipino and Chinese vessels.

Biden’s comments were made as he welcomed Australian PM Anthony Albanese to the White House. Back at home, in Australia, the inhabitants of Darwin – a strategically located city in the Northern Territory key to the US-led defence alliance in the Pacific, will no doubt have been watching. Not surprisingly, the sparsely populated city is already the home of two military bases. The Australian government has announced it is moving hundreds more troops to Darwin and a significant amount of its new defence budget is expected to go towards fortifying the region. This follows the signing, towards the end of 2021 of the AUKUS trilateral security partnership between Australia, the UK, and US.

Tension between the US and China over Taiwan and increasing Chinese military incursions in the Straits of Taiwan, are the main area of focus. However, according to military analysts China’s aggression and intimidation is continuing elsewhere in the Pacific. Besides diplomacy, it must be hoped that the investment in physical military assets in countries like Australia act as a deterrent to conflict in the future.

Sadly, the world remains a dangerous place and following events in Ukraine and Taiwan we now face the risk of conflict escalating in the Middle East. Having to bolster defence spending at a time of high post pandemic debt levels is going to be a political and economic challenge for many governments.

What have we been watching?  

The Middle East and central bank interest rate policy dominated markets last week. There were updates from the Bank of Japan, the Federal Reserve (Fed), and the Bank of England. Markets believe that interest rates have peaked and the focus is now turning to how long rates stay at these levels and when the first cut is likely. Global trade is weak as confirmed by the manufacturing PMIs while global shipping/logistics giant Maersk has announced 10,000 job losses or about 9% of its workforce. Hopes that interest rates have peaked were also helped by much softer than expected US jobs numbers. However, events in the Middle East are creating uncertainty although the price of oil did retreat slightly last week.

Israel has cut Gaza in two and surrounded Gaza city and is ignoring calls for a ceasefire until the hostages are released by Hamas. While the conflict has not escalated, the US said there had been 23 attacks with drones and rockets on its troops and allied forces so far this month by what it believes are Iran-backed forces. Iran backed Houthi fighters from Yemen also launched a drone attack on Israel’s Red Sea port of Eilat. Meanwhile, in Ukraine, the long war of attrition continues with Russian and Ukrainian forces locked in a fierce battle for the frontline town of Avdiivka. Meanwhile, Russia was reported to have bombarded 118 Ukrainian towns and villages in just one day last week.

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In the UK, the Bank of England (BoE) held interest rates as expected at 5.25% by a vote of 6-3 by committee members. The head of the BoE Andrew Bailey said he expects inflation to have fallen below 5% in October. However, the central bank also said ‘the latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time.’ The BoE also trimmed its economic outlook and now forecasts that the UK economy will stagnate in 2024, compared with its previous estimate of modest 0.5% growth. Sterling held around $1.22.

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In the US, the Fed announced no change to interest rates of 5.25%-5.5% as had been expected. The pace of the Fed’s Balance Sheet reduction (QT) is also unchanged at $60bn of US Treasuries per month.  The Fed sees ‘the tighter financial and credit conditions weighing on economic activity, hiring and inflation.’ While leaving the door open to further interest rate hikes, Fed Chair Jerome Powell did provide some crumbs of comfort to the market in the subsequent press conference by saying ‘we have come far with this rate hiking cycle, very far’, raising hopes once again that the US has reached peak interest rates.

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The Bank of Japan raised its core inflation forecast from 2.5% to 2.8% and announced a minor tweak to its unconventional policy of controlling government bond yields. It will now ‘conduct yield curve control with the upper bounds of 1% for those yields as a reference.

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China’s latest PMI business activity indicators were weaker than expected with manufacturing slipping into contraction at 49.5 as the recent ‘Golden Week’ holiday disrupted production although services also dropped albeit remaining in expansion at 50.6. Meanwhile, a Hong Kong judge warns it is ‘highly likely’ that the court will wind up troubled Chinese property developer Evergrande on the 4^th December if a new restructuring plan is not available by then. Could this be China’s ‘Lehman Bros.’ moment?

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Despite the events in the Middle East, Brent oil edged lower to $86 on the disappointing Chinese economic data.

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Finally, it is not just UK pubs that have closed during the ‘cost of living crisis.’ Indian restaurants have faced a ‘perfect storm’ and besides higher energy prices, vegetable oil has more than doubled to between £38 to £45 a litre. The Asian Catering Federation believes one in four Indian restaurants have closed since 2019.

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.