A friend to all is a friend to none

Is it possible to be friends with every major trading nation?

At the current time, is it possible to be friends with every major trading nation?

Sir Keir Starmer recently became the first British PM to meet China’s Xi Jinping in six years, at the recent G20 summit. What is Sir Keir seeking to achieve and is it wise to have a stronger relationship with China?

China is an important UK export market, but also a key cog in many UK supply chains, as well as being an important source of consumer goods imported into the UK. China is the UK’s 5th largest trading partner, representing c. 5% of total UK trade.

Yet, at the same time, MI5 says China is an immense threat to UK national security. Despite this, Sir Keir has given the green light at the G20 meeting to a new Chinese super-embassy in London! China has also been flexing its muscles in the South China sea leading Australia, the UK and the US to form the AUKUS defence pact.

Besides China, Sir Keir faces the challenge of a Trump presidency and the threat of trade tariffs on China and Europe. Donald Trump has a ‘special relationship’ with Nigel Farage, but it is questionable as to whether this extends to the Labour government. At the same time, the PM is trying to develop closer ties with the EU to deal with everything from tackling illegal immigration to bolstering NATO defence spending.

Sir Keir Starmer faces a real dilemma following Donald Trump’s presidential election victory. Does he  look to move closer to Europe? The EU accounts for 49% of the UK’s traded goods exports and 36% of service exports. However, the US is the UK’s largest single export country. Does the PM move closer to an unpredictable Donald Trump and seek a trade deal with America that might shield the UK from US trade tariffs? If he does this, might it make it harder to do business with Europe?

This also comes at a time when two of the EU’s leading manufacturing economies, France and Germany, have their own political issues. France is now in the position of having no dominant political bloc in parliament. Meanwhile, Germany’s coalition government fell apart earlier this month, and a general election is now set for 23rd February, with a confidence vote before that on 16th December.

Labour’s number one priority – UK economic growth, has already been dented by ‘Sir Doom and Mrs Gloom’ pre-budget messaging. The budget tax pain for businesses and farmers could now lead to inflationary pressures which might slow the pace of interest rate cuts in 2025. Which path the PM opts for between the US and EU on trade is likely to have a material impact on the UK’s longer-term economic growth rate.

As in the film ‘Indiana Jones and the Last Crusade,’ Sir Keir Starmer must ‘choose wisely.’ 

 

What have we been watching?

 

Investors continued to weigh the implications of Trump appointees and potential trade tariff policies, but US equities edged higher last week. These were boosted by AI chip maker Nvidia, which delivered 94% sales growth and raised forecast guidance and its shares hit an all-time intraday high before falling back. US bond yields eased back slightly, it looks like higher US borrowing under Trump is tomorrow’s problem! Bitcoin continued its Trump trajectory, hitting $99,000. Global ‘flash’ PMI business activity indicator readings continued to look ‘soft.’ The UK’s leading equities finished the week positively despite weak economic data, boosted by Sterling, which dropped to $1.25. Gold rallied on increased geopolitical tension between the US and Russia over Ukraine.          

It has emerged that Israel hit a ‘specific component’ in Iran’s nuclear program during its missile attack in October.  

Ukraine marked the 1000th day since Putin launched a full-scale invasion of the country. Meanwhile, the US and Russia battle for advantage ahead of Trump’s inauguration. Ukraine carried out the first strikes inside Russia using American ATACMS and British Storm Shadow missiles. Putin signed an upgraded nuclear arms doctrine that includes a possibility of a nuclear response to ‘aggression.’ Meanwhile, regardless of any peace deal in 2025, a new ‘Cold War’ between Russia and NATO is here to stay. An example of possible Russian ‘hybrid warfare’ against NATO members was identified last week.  Germany and Finland said they are ‘deeply concerned’ after an undersea fibre cable linking the two countries was sabotaged. A second cable between Sweden and Lithuania was also severed 24 hours previously.  Meanwhile, a DHL logistics plane has crashed in Lithuania today -accident or sabotage?

Read our latest UK investment insights from Alpha PM

 

In the UK, the Labour government continues to take flak over its recent budget. Besides protests by farmers, the UK’s 79 largest retailers wrote to Chancellor Rachel Reeves warning the budget changes will increase inflation and reduce jobs. The result of the endless talking down of the UK economy together with the budget pain was reflected in the ‘flash’ November PMI business activity indicator reading, which saw manufacturing dip to 48.8 and the service sector dip to 50, moving the composite reading into contraction at 49.9. UK retail sales were also poor in October. Has the new government crashed the economy? Sterling dropped to $1.25.            

October inflation was a bit higher than expected at 2.3%, reflecting higher energy costs and sticky service sector inflation, which is running at 5%. The chances of a December interest rate cut have evaporated from 50/50 to 11%.  UK mortgage rates have been creeping up, with the average two-year deal now standing at 5.5%. Government borrowing was also higher than expected in October, as debt interest payments hit a record high and public sector pay rises contributed to higher spending. Borrowing stood at £17.4bn last month, the second highest October figure since records began in 1993. Is it little wonder that the ‘yield spread’ between UK gilts and German bunds is now greater than that following the Liz Truss ‘crisis.’           

 

The European Central Bank (ECB) warned that the Eurozone risks another debt crisis if the bloc cannot boost economic growth. It pointed to elevated debt levels and higher budget deficits as well as tepid growth. The funding costs of countries with debt-to-GDP ratios of more than 100% have widened notably during recent financial market volatility.  The borrowing costs of Italy and Spain, both at the centre of the last bond crisis, have been replaced by concerns about France. The ECB also flagged the risk from Donald Trump trade tariffs and high US government debt. The ‘flash’ November PMI business activity indicator for France and Germany was awful, with the composite readings (manufacturing and services) dropping to 44.8 and 47.3, respectively.

 

In the US, the November ‘flash’ PMI business activity indicator showed manufacturing still in contraction at 48.8, but the service sector jump to 57.0 for a composite reading (manufacturing and services) of 55.3.

Read our latest investment insights from Alpha PM

 

Brent oil climbed to $75 on escalating geopolitical tension.

Finally, talking about Sir Keir Starmer’s dilemma over the US and EU and their relative size. The Magnificent Seven (Mag7) US tech behemoths have further increased their dominance. At the time of the 2016 US presidential election, the Mag7 had a combined value of $2trillion and was one-sixth the size of the European equity market. Fast-forward to today, and following a Trump election victory sugar rush, the Mag7’s combined value is $16.8trillion, which is bigger than the entire European stock market!

 

Read Last Week’s Alpha Bites – Is Starmer the Wally with the Brolly?

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