Turning the Screw

In last week’s Alpha Bites, ’A wolf in sheep’s clothing’ we highlighted how China had suspended some beef imports from Australia due to the latter’s call for a global enquiry into the Covid-19 outbreak. Developments appear to have taken a more sinister path recently with Australia coming under attack from a wave of foreign cyber hackers. Everything from government to schools, health, industry and utilities had to fend off cyber-attacks.

Australian premier Scott Morrison said that a number of ‘cyber bombs’ were identified coming from a ‘sophisticated state-based cyber actor’. While not naming the super-power, it is suspected to be China. Scott Morrison has made his concerns clear to the other members of the ‘Five Eyes’ intelligence alliance – the UK, US, Canada and New Zealand. A Chinese foreign affairs spokesman said the claims by the Australian PM were ‘baseless and nonsense’. The cyber-attack must be a particular concern for Australia as China is a major export customer, particularly for natural resources such as iron ore.

The cyber-attack comes at a time of deteriorating relations between the US and China over the new security law for Hong Kong into which the UK has also been drawn. There are also ongoing concerns about 5G and Huawei. The US Department of Defence has determined that 20 leading Chinese companies including Huawei are either owned or backed by the Chinese military. Earlier this month, former Google CEO Eric Schmidt told the BBC that there’s “no question Huawei has engaged in some practices that are not acceptable in national security.” The firm has repeatedly denied accusations that it passes data to Beijing and insists it’s independent from government.

China also looks to be turning the screw on Hong Kong with the publication of the new proposed national security law which is due to be voted on in the next few days.

Covid-19 remains the single biggest threat to the global economy but the deterioration in relations between the US and its allies and China presents a further unwelcome headwind.

What have we been watching?

The World Health Organisation (WHO) warned the Covid-19 pandemic is accelerating with cases continuing to grow in Brazil, India and Mexico. The US also passed the grim benchmark of 120,000 dead and has seen cases surge in a number of states such as Florida and Texas. The Centre for Disease Control warned the US is ‘teetering on the verge of apocalypse’ and estimated more than 23million Americans might actually have Covid-19.

In a number of countries new infections are spiking as lockdown measures ease. This has raised fears of a second wave but at the moment the spikes appear due to specific clusters such as that in a German meat processing plant. In China the city of Hebei which is some 90-miles from Beijing has had a complete lockdown re-imposed on 400,000 people that live there. In the UK, the track and trace system has identified a cluster of cases in Leicester – will the UK government be as aggressive as the Chinese with a regional lockdown? Could they enforce it if they did?

Investors continue to focus on central bank support and the ‘other side of the valley’ with US investors in particular appearing to still expect a V-shaped recovery in the US economy in 2021. However, America’s highly regarded infectious expert Dr Anthony Fauci warned against complacency, saying the next few days will be crucial to stem a ‘disturbing surge’ in Covid-19 infections in some US states.

Markets were briefly rattled early last week as the White House stance on China appeared to be thrown into confusion. US trade adviser Peter Navarro announced that a trade deal between the two countries was ‘over’. According to him, the turning point came after the US learned about the Covid-19 outbreak only after the Chinese delegation had left Washington following the signing of ‘phase one’ of the trade deal on 15^th January. However, President Trump tweeted ‘The China trade deal is fully intact. Hopefully they will continue to live up to the terms of the agreement!’. Peter Navarro said his comments had been taken out of context and instead referred to the ‘lack of trust we now have in the Chinese Communist party’.

Markets were further unnerved by reports that the US is considering new tariffs on $3.1bn of exports from France, Germany, Spain and the UK. This relates to the ongoing dispute over Boeing and Airbus aircraft subsidies by the US and Europe which has rumbled on for some 15-years through the World Trade Organisation arbitration system. The US has already put tariffs of 15%-25% on $7.5bn of EU goods.

The IMF lowered its global economic growth forecast for both 2020 and 2021, as data since April has pointed to a sharper downturn than it previously envisaged. The IMF now expects a contraction in 2020 of 4.9% against the 3% it forecast just 10-weeks ago. A recovery is expected in 2021 but the growth forecast has been cut from 5.8% to 5.4%.

Following PM Boris Johnson’s upbeat Brexit comments last week, Sterling edged back below $1.24. German Chancellor Angela Merkel suggested she may be hardening against the idea of any compromise from the EU and warned that ‘Britain will have to live with the consequences’ if Boris Johnson ditches closer economic ties with Europe.

In the UK, pubs, restaurants, hotels and hairdressers are to open from 4^th July in England when social distancing rules will be eased from 2 metres to ‘one metre plus’. Meanwhile, as many parts of industry have started up, purchasing managers activity indicators re-bounded sharply in June with that for manufacturing edging back into expansion from contraction. The number of employees on furlough reached 9.2million. The key for the UK economy remains how many of these will have jobs to go back to?

In Europe, the purchasing manufacturers activity indicators recorded the second-largest ever bounce, beaten only by May’s record increase reflecting the easing of lockdown measures.

In the US, consumer spending increased by 17.7% in May month-on-month as more states unlocked but may prove short-lived given the latest surge in Covid-19 new cases.

In China, industrial profits grew slightly in May, the first rise in six months.

Brent oil drifted back to $40 on the spike in Covid-19 cases and downgrade in global economic growth forecasts by the IMF.

Finally, first of all it was impossible to get hold of toilet rolls, then hand sanitisers, then pasta and flour and then a new bicycle as retailer’s stocks were exhausted. Now, holiday cottages may be impossible to book following the new social distancing guidelines and surge in ‘stay-cations’. One regional holiday firm reports online visitors up 150%. Great news at last for the UK tourism industry but the sector still needs overseas visitors as well as the hot weather spell to continue.

Read Last Week’s Alpha Bites – A Wolf in Sheep’s Clothing

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Turning the Screw

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