From Russia with Love

“But what makes you think that M will oblige you by falling in with your plan? …For the simple reason that this is so obviously a trap.”

Admiral Lord West, former chief of the Royal Navy has warned that Britain is ‘one mistake away from a war with Russia. Vladimir Putin wants to show he is a great player on the world stage but it’s extremely dangerous.’

Defence sources claim that that more Russian submarines are encroaching in British waters than during the Cold War and that these have been actively looking for the Royal Navy’s submarines. Admiral Lord West warned that ‘this could become a very escalatory measure.’ General Sir Nick Carter the chief of the defence staff has also warned that Russia was ‘flexing its muscles in a way not displayed since the last Cold War.’

Britain has already seen what Russia’s secret service is capable of with the Salisbury Novichok poisonings. Relations between Russia and the West also appear to be deteriorating following the return of poisoned Russian opposition leader Alexei Navalny and his immediate arrest. Economic sanctions have been the main weapon in the West’s arsenal but will the EU take action? More than 5,000 Russians are reported to have been arrested over the weekend as thousands joined in Nalvany protests.

American President Joe Biden has also had his first telephone conversation with Vladimir Putin and made it clear the US will act firmly in defence of its national interests in response to actions by Russia that hurts its national interests. Both parties said they agreed to maintain contact going forward. In the past Joe Biden has referred to the Russian leader as a ‘KGB thug’.

Joe Biden also has the Taiwan ‘hot potato’ to deal with. Many Taiwanese want a separate nation while China sees Taiwan as a breakaway province that will eventually be part of the country again. The Taiwan Strait has seen increased military aircraft interventions in recent weeks.

The Covid-19 pandemic is an unwelcome distraction that potentially allows Putin to create a smoke screen for his sabre rattling.

What have we been watching?

Rising Covid-19 cases in a number of countries, worries over mutant strains (South African), vaccine production challenges, concerns about more lockdown measures and fears of a US casino type market bubble saw markets move into reverse gear. These fears offset positive outcomes from two more phase III trials for Covid-19 vaccines.

The focus is now upon the US $1.9trillion support package although President Joe Biden suggested that this could take another two weeks, rejecting calls to scale down the proposal. Comments from the US Federal Reserve also unnerved investors. On top of this were some quite extraordinary share price movements in the US market driven by ‘Reddit mania’ which also spilled over into some UK names.

The private punter/Reddit/Twitter share ramp in the US can only be described as utter madness. Private investors have been buying call options on even the smallest stocks aided by trading systems like Robinhood. As the share price gets ramped, the market maker writing the call option then has to hedge it out and as the underlying stock rises so the delta changes and they have to buy more creating a squeeze. In turn, some private investors using message boards have ganged together to drive up the share prices of those companies ‘shorted’ by hedge funds. These hedge funds in turn have had to buy shares to reduce or close out their short positions to limit losses. A number of US hedge-fund titans are believed to have lost billions of dollars. The Reddit mania is best reflected by Game-Stop Corporation which has soared 1700% this month! One shrewd market commentator said ‘gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino, complain about a message board of posters also treating the market as a casino’. The worry is that hedge funds have to deleverage and sell equities to raise cash due to the losses incurred from rising share prices in the stocks they have shorted. Total US call option volumes for stocks and indices have skyrocketed leading another respected market observer to say ‘many bubbles through history have been created via increased leveraged trading and the pattern is arguably repeating here’.

The Reddit mania has spilled over into the commodities market with silver rising by 7%, to a five-month high and in turn sending silver mining shares up sharply this morning.

The short squeeze causing some implosions in some hedge funds along with speculative trading in crypto-currencies like Bitcoin are once again ringing alarm bells about a tech and US market bubble. These fears have been increased by the growth of SPACs in the US market. A SPAC is a special-purpose acquisition company with no business activity that raises funds from investors to fund or buy a start up company. Think of an even riskier version of Neil Woodford’s Patient Capital fund and you will get some idea of how crazy this all is! Some $83bn was pumped into SPAC’s last year alone.

On a slightly brighter note, the IMF raised its global economic growth outlook reflecting a vaccine driven strengthening of activity later in the year and additional policy support in a few large economies. The 2021 growth forecast has been raised from 5.2% to 5.5%.

A row developed between vaccine producer Astra Zeneca and the EU. While the EU only approved the vaccine last Friday, it placed an order for 300m doses in August 2020 albeit well behind that placed by the UK government. However, Astra Zeneca has said that reduced yields at a manufacturing site within its European supply chain meant that the number of initial doses for EU member states would be lower -some media reports suggest by as much as 60%. The European Commission had to back down from imposing a block on the Irish/Northern Ireland border having threatened to prevent vaccine exports. Astra Zeneca will now supply an additional 9m doses to the EU by March. Ursula von de Leyen called it a ‘step forward’ but the doses are now expected to be only half of what was hoped. Clearly the EU is a long way behind the UK on its vaccine roll-out programme with ramifications for easing of lockdown.

Pfizer-BioNTech’s has also recently announced delays to vaccine shipments because of work to increase capacity at its Belgian plant. The EU has warned that it will tighten exports of Covid-19 vaccines produced in the bloc. The EU has already faced criticism from some member states for the slow roll-out of its vaccination programme. The UK government is still confident that it has enough deliveries scheduled to meet its mid-February vaccination target although supply could be tight. Meanwhile, French pharmaceutical company Sanofi is to start producing up to 125million doses of the Pfizer vaccine at its factory in Germany to help increase supply.

In terms of Covid-19 vaccine development, there was positive news from Moderna which said that its vaccine was effective against the UK Kent variant although the South African strain led to a sizeable reduction in the effectiveness of antibodies so they are working on a booster shot. California thought it had the UK variant but has now discovered it is their very own strain that also transmits more easily and it is likely so will other countries. There were two positive phase III vaccine trial results from Novavax and Johnson & Johnson/Jansen. The Novavax two dose fridge temperature storage vaccine delivered 89.3% efficacy and is effective against the Kent strain at 86% but against the South African strain was 60% effective. The Jansen vaccine is one dose with fridge storage and showed 72% efficacy. However, against the South African strain this dropped to a 50%’ish efficacy. What is encouraging from the Jansen vaccine is that is appears 85% effective in preventing severe illness and 100% of hospitalisations and deaths.

Read our latest UK investment insights from Alpha PM

The UK vaccination programme continues to progress well with almost 9m now having had a jab. More significantly, the vaccine roll out to care homes is complete. Otherwise, it was a grim week for the UK with the number of Covid-19 deaths surpassing 100,000 perhaps reflecting a legacy of poor decisions by the government. Almost 90% of deaths were those aged 65 and over which suggests that if the vaccine rolls out to more of those in the highest risk group and lockdown drives the ‘R’ rate lower that the virus can eventually be beaten. Sir Simon Stevens head of NHS England has also offered a ray of hope. ‘There are a number of other treatments in the pipeline and I think it is possible over the course of the next 6-18 months Coronavirus also becomes a more treatable disease with anti-viral and other therapies, alongside the vaccination programme’.

Read our latest US investment insights from Alpha PM

 

In the US, the Federal reserve (Fed) announced no policy change as expected but Fed Chair Jerome Powell warned that the ‘pace of economic recovery and employment has moderated’ but added that vaccines are a sign of hope and a recovery in the second half of 2021.

Read our latest Chinese investment insights from Alpha PM

 

The People’s Bank of China (PBOC) withdrew $12bn of liquidity out of the market via open-market operations.  This may have been to hold back on over -exuberance while continuing to support stimulus projects. The PBOC may also be keen to hold back in case there are further outbreaks of Covid-19 which seem likely over the Chinese New Year.  China is intent on restoring 6% economic growth targets.

Finally, as the pressure mounts to get children back into school. A study on home schooling has revealed that parents can only do one-third of their children’s maths and struggle with the other three-quarters!

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Read Last Week’s Alpha Bites – A Percy Pig in a Poke

 

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