A World divided

The war in Ukraine has created a divided World.

China and India have sat on the side-lines during the conflict, but both have indirectly supported Putin by buying vast amounts of cheap Russian oil and gas. A new ‘axis of evil’ has developed with North Korea and Iran also supplying weapons to Russia. In doing so, Russia has violated UN resolutions for weapons procurement.

Under an increased threat from Russia, NATO has become larger with new members Sweden and Finland. The US has also sought to strengthen alliances with Japan and Australia, mindful of China’s ambitions in the South China Sea. In a seemingly long-drawn-out conflict, Ukraine has continued to ask for more support from its NATO allies. This led the UK to consider allowing Ukraine to use Storm Shadow missiles to strike targets in Russia, but the US has so far blocked this proposal. Meanwhile, Putin has warned that this would mean nothing other than the direct participation of NATO in the war in Ukraine.

Regardless of Putin’s sabre-rattling, we are now in a new Cold War, including Grey Zone Warfare. This includes risks to undersea data cables and energy infrastructure, manipulation of social media and cyberattacks. The number of cyberattacks on the UK is increasing at an alarming rate, with recent high-profile examples being that on several London hospitals in June and more recently that against Transport for London.

The government recently announced that UK datacentres are to be classified as critical national infrastructure. They will join the emergency services, healthcare, energy and water supplies as well as space and defence. This means datacentres would get extra government support during a major incident, such as a cyberattack.

Whether or not a peace deal in Ukraine is possible, only time will tell.

Regardless, Putin and Russia will remain a threat to NATO. As one of Ukraine’s most vocal supporters, the UK will no doubt be towards the top of Putin’s target list. The UK must ensure its data and energy infrastructure, particularly that undersea, is provided with maximum security. The recent software blunder at cyber security firm Crowdstrike, which affected millions of people and businesses around the World, is a good reminder of how reliant we all are on the internet.

What have we been watching?

A positive week for US equities courtesy of the US Federal Reserve, which allayed previous fears about the US economy. UK equities lagged as Sterling strengthened while the rhetoric from ‘Sir Doom and Mrs Gloom’ ahead of the Budget probably didn’t help!

It was a busy week for central bankers with meetings of the Federal Reserve (Fed), Bank of England (BoE) and Bank of Japan (BoJ). The most significant of these was the Fed meeting, where market expectations over the past week had shifted from an initial 0.25% cut to one of 0.5%. Over the summer, fears have risen about a possible US recession, which would require an emergency 0.5% cut. Despite cutting by 0.5%, the Fed was able to reassure markets as current US economic activity was described as expanding at a ‘solid pace.’ Meanwhile, the Bank of England kept interest rates on hold as expected, and as a result, Sterling moved up to $1.33.

Events in the Middle East took another ominous twist. Israel’s Defence Minister announced ‘a new phase in the war’ as it set a goal of returning residents to the north. Lebanon is on edge after thousands of electronic devices exploded. US hopes of brokering a Gaza ceasefire look to have been quashed, with war between Iran – backed Hezbollah and Israel looking more likely as both sides launch missile strikes across the border.

US Deputy Secretary of State Kurt Campbell warned ‘the Cold War pales in comparison to the multifaceted challenges that China presents.’ Meanwhile, the US Justice Department said it had neutralised a cyber attack on 200,000 global devices, alleging it was run by hackers backed by the Chinese government.

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In the UK, headline CPI inflation for August was unchanged at 2.2%, but core inflation rose from 3.3% to 3.6% while services inflation moved back up from 5.2% to 5.6%. The Bank of England voted 8:1 to keep interest rates on hold at 5% as it expects inflation to hit 2.5% by the end of the year. The pace of Quantitative Tightening  (QT) is also being maintained at £100bn until September 2025. Markets are still expecting a 0.25% cut in November, with a further 1% to follow throughout next year. UK debt hit 100% of GDP for the first time since the 1960’s, fuelling expectations of ‘painful’ tax rises and spending cuts in next month’s Budget. Retail sales surged to a two-year high in August, but there are signs that consumer concern is increasing due to the messaging from ‘Sir Doom and Mrs Gloom’ with expenditure on bigger ticket items such as kitchens being adversely impacted. Fears about the Budget have seen a record amount of capital gains tax paid in August, while pension companies are reported to be struggling to cope with the volume of enquiries as over 55’s consider withdrawing the £268,275 maximum tax-free lump sum.

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In the US, the Fed announced a 0.5% cut in the Federal funds target range to 4.75%-5%. The Fed also guided markets that this was not a ‘one and done’ decision, with every member of the committee seeing rates fall further over the course of the next year, as reflected in its updated ‘dot plot’ chart. This shows US interest rates falling to 4.4% at the end of 2024 and 3.4% by the end of 2025. However, Fed Chair Jerome Powell seemed to have had a difficult time explaining why a 0.5% cut was appropriate. Judging by market pricing now, nor does he seem to have convinced markets that it does not imply further 0.5% cuts moving forward, despite saying he ‘does not think that anyone should think this is the new pace.’ However, the Fed was able to deliver its well-versed ‘Goldilocks’ scenario where monetary policy is ‘just right’ with inflation under control and the US economy growing.

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Japanese inflation was in line with expectations at 3% in August, and the Bank of Japan made no change to monetary policy as expected, with rates maintained at 0.25%.

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Brent oil edged up above $74 on the US interest rate cut, as the situation in the Middle East deteriorated.

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Finally, only in Britain! You couldn’t make it up if you tried. First, prisoners are released early to relieve overcrowding, but contractor Serco fails to tag many of these and is now playing catch-up. Secondly, plans to build 20,000 extra prison places have been plunged into doubt after the collapse over the weekend of ISG, the UK’s sixth largest construction business, which is involved in the project. Someone deserves to be locked up!

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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.