Game of Drones

This week in ‘Game of Drones’ we are revisiting a previous theme of Alpha Bites, drones and it just happens to coincide with one of our all-time favourite TV series. The battle for the seven kingdoms is about to reach its climax as the premier of the new and final series of Game of Thrones was aired in the UK in the early hours last night.

Apart from fire-breathing dragons, drones have tended to capture headlines in the UK recently – for the wrong reasons. Being used to deliver drugs into prisons and involving further near-misses with aircraft landing and taking-off.

However, drones or to give them their technical name, unmanned aerial vehicles (UAVs) are being increasingly used beyond the military and hobbyists. The global UAV market is already estimated to be worth $6bn and although most of this was for the consumer market, commercial sector interest is starting to take-off. The commercial market will take longer to build as it will be governed by legislation, although in a first step, the US Federal Aviation Administration opened up American airspace to commercial UAVs last year. Recently, the first dedicated police drone in the UK has been launched. Logistics companies such as Amazon are also busy trialling UAVs.

President Donald Trump recently met US UAV executives who believe America is falling behind the Chinese who are estimated to account for 70% of the non-military UAV market. However, some large US corporates such as Boeing, Intel and Qualcomm are now becoming increasingly involved in the commercial UAV sector. While UAVs have been regarded as a cool toy or Christmas present they are on the verge of becoming an essential tool for many businesses and if adopted, more widely, could really drive business growth.

What have we been watching?

Central bank commentary has been the big story over the last few weeks. As if by ‘magic’ some of the world’s leading central bankers have started simultaneously to signal that the end of QE monetary stimulus is approaching. Markets are now trying to establish what exactly this means and government bond yields had been creeping higher before the release of US inflation data. This comes at a time when some forecasters have started to lower global economic growth projections. Will this start to make central bankers reconsider guidance?

Well, Bank of England deputy governor Ben Broadbent said business sentiment was key to interest rate increases. ‘In my opinion, it is a bit tricky at the moment to make a decision. I am not ready to do it yet’. Then markets took comfort from Fed Chair Janet Yellen in the USA as she suggested interest rate hikes would be gradual and will not have to rise much further. She also said that the US economy is healthy enough to absorb further gradual interest rate increases and the slow wind down of the Federal Reserves’ massive bond portfolio accumulated during the earlier stimulus programme. It looks less likely that the Fed’s ‘dot plot’ projections of two more 0.25% interest rate hikes this year will be fulfilled and the interest rate futures market is suggesting a 53% chance of just one more hike in December. June inflation data was also lower than expected. As for the European Central Bank (ECB), Mario Draghi is reported to be attending the Jackson Hole Symposium in the US at the end of August for the first time in three years. Markets read his attendance as preparing the ground for a further taper announcement from the ECB.

Meanwhile, the political storm surrounding Donald Trump intensified. His son released email exchanges with a Russian lawyer from last year that indicated the Russian government was trying to damage Hilary Clinton and backing his father’s presidential campaign.

The Organisation for Economic Co-operation and Development (OECD) said that global economic growth was likely to be weaker than expected according to its leading indicators from 34 major economies. While prospects are encouraging, the rate of growth is still weaker than desirable. While faster growth is indicated for France and China, this is offset by slower projected activity in the USA, UK, Italy and Russia. The Atlanta Fed downgraded their US economic growth forecast for the second quarter from 2.6% to 2.4%.

Global credit agency Standard & Poor’s downgraded its economic outlook for the UK to 1.4% growth in 2017 and 0.9% in 2018 due to Brexit uncertainty but said it expected the Bank of England to continue its current ultra-accommodative stance with no interest rate hike to occur before mid-2019.

Turning to Brexit. This week will see the second round of UK-EU negotiations. Two main issues are likely to be discussed. First, on the issue of citizen rights, is the UK prepared to move its offer? Second, the financial settlement. Last week in a statement to the House of Lords, the Brexit minister acknowledged the existence of that liability.

In the UK, the British Retail Consortium (BRC) sales data for June provided some relief that consumer spending is not falling off a cliff but was helped by the arrival of summer which boosted leisure, clothing and food sales (BBQ, ice cream etc.). However, real household spending power continues to be squeezed. The Royal Institute of Chartered Surveyors(RICS) house price survey for June showed confidence in the housing market at an 11-month low with London and the South-East weaker than the rest of the country due to ‘political uncertainty’. A Bank of England (BoE) survey of banks and building societies found they expect to rein in lending in the months ahead as they become more cautious about the economy. Mortgage availability is likely to be reduced for house buyers with deposits of less than 25% and in particular those below 10%. The length of interest-free periods on credit card balance transfers is expected to be reduced. This follows warnings from the BoE about consumer borrowing.

In Europe, industrial production was stronger than expected in May particularly consumer durable goods.

In the USA, June inflation was lower than expected and economists have lowered their 2017 forecast for core inflation to 1.7%. June retail sales were a little disappointing. However, June industrial production was ahead of expectations.

Chinese trade data for June was better than expected with global demand helping offset the squeeze on domestic credit growth. Chinese economic growth in the second quarter was ahead of expectations at 6.9% with strong retail sales and industrial production. Recently released statements show leader Xi Jinping is de-emphasising headline GDP which suggests China may accept lower economic growth from next year. The Peoples Bank of China is also stressing more prudent financial regulation is required which may impact growth in the longer-term.

OPEC was reported to be pressuring Libya and Nigeria to reduce output. Brent oil held around $48 after OPEC confirmed that output rose in June while adding that it expected that in 2018 demand would still be below its current output. Saudi Arabia produced slightly above its output target last month which must challenge OPEC’s resolve.

Finally, in last week’s Alpha Bites ‘Hot, hot, hot’ we asked at what cost to the planet had improvements in productivity through the use of air-conditioning been achieved? News this week that a massive iceberg, four times the size of London has broken off from the coast of the Antarctic. It’s telling you something!

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Game of Drones

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