A highly charged race to the White House

With under a month to go, the US presidential election race currently looks too close to call, but the outcome will be globally significant.

Whether Kamala Harris or Donald Trump, the political landscape will likely see many twists and turns over the coming weeks.

While US focus has been upon the war in Ukraine and Gaza, it has also been seeking to clip China’s wings, as the latter flexes its muscles in the South China Sea. This includes recent incidents involving US allies the Philippines and Japan, while Taiwan remains the main bone of contention between the two super-powers.

Meanwhile, a technology Cold War is escalating between the US and China. The US is keen to restrict the movement of key US technology, funds, and expertise to businesses based in China and indirectly the Chinese military.

Tensions have increased as the US imposed 100% tariffs on Chinese EVs, while China has placed restrictions on some rare earth metal exports. The latest source of friction is in AI. US export controls have sought to cut off access to Nvidia’s AI processors, such as the H100 and forthcoming Blackwell series. However, China’s technology companies are still able to buy lower-performance processors such as Nvidia’s H20.

The Chinese mega-technology companies, such as Alibaba, Tencent, Baidu and TikTok parent ByteDance, are ramping up capital expenditure on AI infrastructure, despite US sanctions. Chinese tech groups are believed to have doubled capital spending to over $7bn so far this year. This has been focused upon buying processors and infrastructure related to powering the training of large language models for AI.

The US is also planning to restrict private equity investment in some Chinese technology. This, together with slower Chinese economic growth and political tensions, has applied the brakes to dealmaking by most of the bigger private equity firms, such as Blackstone, KKR and Carlyle. To add to the uncertainty are fears of tighter control over business by Beijing, that could block exits for private equity investors.

Compared with the ‘gold rush’ of previous years, seven of the top ten private equity firms have made no new investments in China in 2024.

While Ukraine and the Middle East continue to dominate news headlines, relations between the US and China, are likely to remain chilly, whoever is president. However, if Trump wins, China can expect greater tariffs.

What have we been watching?    

Markets were alarmed by the rapid escalation of events in the Middle East, which saw Brent oil jump to $78 and gold hit $2650. This was partly countered by China’s stimulus measures. Chinese equities have rallied strongly following the recent interest rate cuts and equity support mechanism. Meanwhile, blow-out’ US jobs numbers dampened hopes of more aggressive US interest rate cuts while in the UK, confusion reigned within the Bank of England over the pace of interest rate cuts!             

Israel’s PM Benjamin Netanyahu said Iran will pay after it fired over 180 missiles at Israel. Last time Iran carried out a missile strike, President Joe Biden advised Netanyahu to ‘take the win’ and not to carry out a big response, and Israel didn’t. This time the mood is very different, with very little room for diplomacy. Israel’s former PM is calling for it to go after Iran’s nuclear facilities in order to ‘fatally cripple this terrorist regime.’ President Joe Biden said he does not support a retaliatory strike on Iranian nuclear sites. Some analysts have suggested Israel may strike the Kharg Island terminal which handles the bulk of Iran’s oil exports in the Persian Gulf. Iran accounts for 4% of world oil production. However, 20% of the world’s oil supplies flows through the Strait of Hormuz, so would Iran and its Houthi allies attempt to disrupt any extra production from Saudi Arabia if its own oil production was hurt?

Events in the Middle East have tended to overshadow the war in Ukraine. Russian forces continue to edge forward in eastern Ukraine and have entered Vuhledar in Donetsk. Meanwhile, Putin looks to be digging in for the long-haul with reports that Russian defence spending is to increase by 25% to 40% of Russia’s total budget.

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Sterling dropped towards $1.31 following comments from Bank of England (BoE) governor Andrew Bailey, who held out the prospect of the central bank becoming a ‘bit more aggressive’ in cutting interest rates, provided the news on inflation continued to be good. However, no sooner had this been said when Huw Pill the chief economist of the BoE warned that interest rates ‘should not be cut too fast.’ Markets are fully pricing a 0.25% interest rate cut in November with a potential second one in December.

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Eurozone inflation continued to trend lower in September, supporting hopes of a further two 0.25% interest rate cuts by the European Central Bank at its next meetings in October and December. CPI inflation came in at 1.8% in September while core inflation was also in line with expectations at 2.7%.

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The key US ISM manufacturing survey undershot consensus estimates for the sixth consecutive month, remaining unchanged at 47.2 in September. However, service sector activity picked up at a greater pace than expected last month with a reading of 54.9. US Federal Reserve (Fed) Chair Jerome Powell said the central bank is committed to lowering interest rates ‘over time’ while highlighting the economy remains on a solid footing. However, he added the Fed ‘is not a committee that feels like it’s in a hurry to cut rates quickly.’ His comments saw markets slightly dial back expectations for the size of US interest rate cuts. This was then followed by very strong US jobs numbers that far exceeded forecasts. While these should put to bed any lingering fears over the state of the US economy it will also dampen hopes for further 0.5% interest rate cuts by the Fed which is more likely to adopt a more gradual approach with 0.25% cuts.           

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Japan’s incoming PM Shigeru Ishiba announced plans for a snap election on 27^th October.

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Global financial markets have reacted positively to China’s surprise policy stimulus. Chinese equities have lost more than 45% of their value since 2021 but rallied 20% on the stimulus news prior to shutting last week for the Golden Week national holiday. Meanwhile, three of the country’s largest cities have rolled out measures to revive the local property market, while Beijing announced plans to support the re-financing of mortgages. However, is the current stimulus the silver bullet or a giant sticking plaster? Meanwhile, Chinese manufacturing activity remained in contraction in September with a PMI reading of 49.8 while the services PMI was 50.0

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Brent oil re-bounded off its recent low of $70 with the biggest jump in almost two-years to $78 following Iran’s missile attack on Israel.  

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Finally, what goes up… Often called ‘white gold,’ lithium deposits have been eagerly sought by miners. However, due to a combination of slowing electric vehicle sales and global oversupply, lithium ore has fallen in value by 75% since mid-2023. Lithium-ion storage batteries for electricity is a big growth area, but some analysts warn that lithium oversupply may continue until 2028. Not good news for the two leading lithium ore producers – Australia and Chile or those seeking to develop potential lithium deposits in Cornwall.

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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.