War Games

Despite the latest peace moves by French president Emmanuel Macron, a Russian invasion of Ukraine is still a risk.

Clearly, President Vladimir Putin does not want Ukraine to join NATO. No wonder he is fretting, as since 1997 some 14 eastern European countries have joined NATO including Lithuania, Latvia and Estonia – former Soviet republics which border Russia. Ukraine is currently a ‘partner country’, meaning there is an understanding to join NATO sometime in the future.

Russia has accused the West of ‘hysteria’, but has Putin’s rhetoric backfired by leading to a resurgence of NATO that might actually lead to more countries joining? Russian demands for Sweden and Finland to be blocked from joining NATO has already awakened the debate in Sweden.

Gotland is Sweden’s largest island and occupies a strategic location in the Baltic Sea, lying between Sweden and Latvia. It has long been considered the key to the Eastern Baltic. Russian military plans from the Cold War that have subsequently been obtained by Sweden make it clear that Gotland was a prime target as it would make an ideal platform for long-distance missiles and anti-aircraft platforms. When Russia moved landing ships from its Artic ports into the Baltic a few weeks ago, Sweden reacted by dispatching tanks and combat vehicles to the island in a show of force.

PM Boris Johnson has said he is prepared to deploy UK troops to protect NATO allies if Russia invades Ukraine. The US is also deploying troops in Poland, Germany and Romania. In the meantime, the West has threatened Russia financial institutions, energy companies and those individuals who are key to the continuation of the Russian regime with economic sanctions. Will this be enough to deter President Putin? Is he trying to distract attention from problems at home? – Russia has its own cost of living crisis.

This is a reminder that the world remains a dangerous place. In an ESG driven investment world, could defence contractors be considered a ‘defensive’ investment?

The Russia/Ukraine situation has wider ramifications and could exacerbate the current energy crisis. Furthermore, in a show of unity, last week Chinese President Xi Jinping and Vladimir Putin met in Beijing. Are we seeing even closer ties between Russia and China?

What have we been watching?

Central bank interest rate action, inflation and Russia/Ukraine continued to grab investor attention.

Concerns about Covid-19 have faded even though a sub-variant of the more contagious Omicron strain, BA.2 has now been detected in over 57 countries. Markets now appear to be working on the basis that vaccines/anti-bodies mean new variants are manageable and we can instead focus on normal economic news instead.

There were angry clashes between Russian and US envoys at the UN Security Council, after the US called a meeting to discuss Moscow’s troop build-up on its border with Ukraine. Diplomatic efforts continue while the US and UK have promised further sanctions if Russia invades Ukraine.

Trade relations between the US and China are at a ‘very difficult’ stage according to American Trade Representative Katherine Tai. Under former President Donald Trump the two countries signed a ‘phase-one’ agreement in January 2020 in which Beijing pledged to increase its purchases of American products and services by at least $200bn over 2020 and 2021. However, this was before Covid-19 which has adversely impacted China and global economic growth.

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In the UK, the cost-of-living crisis was in focus. Shoppers have been hit by the highest price rises in 10-years, with food inflation rising to 2.7% in January. The Chairman of Tesco has warned that food price inflation could reach 5% by the Spring. The energy price cap will increase by 54% to £1,971 in April. Council tax bills also look as if they will be increasing by a significant amount. In addition, borrowing costs are rising. The Bank of England (BoE) increased interest rates from 0.25% to 0.5%, as expected. The increase was approved by 5 votes to 4, however those in the minority had wanted to be even more aggressive and raise interest rates to 0.75%. Policy makers are alarmed that inflation could move above 7% in Spring, more than triple their target.

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The European Central Bank President Christine Lagarde is no longer ruling out an interest rate hike this year, a pivot toward the tightening stance of other leading central banks with a shift in policy guidance as soon as next month. Futures are now pricing in up to four interest rate hikes in 2022. The surprisingly ‘hawkish’ comments citing unexpected record inflation data compares with recent comments insisting price growth would slow by the end of 2022.  Sterling briefly hit a two -year high on the BoE interest rate move before slipping back to €1.18 on the ECB ‘hawkish’ comments.

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The US economy added substantially more jobs than expected in January with December’s data also being revised upwards materially. The strong data is likely to drive the Federal Reserve to increase interest rates.  Meanwhile, the wild ride continued for US technology investors with Amazon soaring but Meta (Facebook) plummeting.

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The Governor of the Bank of Japan vowed to keep ultra-easy monetary policy in the wake of hawkish comments from the BoE and ECB. He believes inflation remains subdued in Japan due to the delay in the economy’s recovery from Covid-19.

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Brent oil edged up to $93. Cold weather sweeping across large parts of America may disrupt supplies. In addition, OPEC+ stuck with its target of a monthly output increase of 400,000 barrels a day. OPEC + blames the current energy crisis on those nations that have failed to ensure adequate investment in fossil fuels as they transition to greener energy.

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Finally, another CO2 crisis averted? Last October, the government was forced to step in with subsidies for US owned CF Industries that supplies 60% of the UK’s food grade CO2 to sustain production but this deal ended on January 31^st. The CO2 is a by-product of the ammonia manufacturing process. Ammonia prices recently hit a record high of $1,135 a tonne and partly reflects concerns that 20% of the world’s supply comes from Russia and Ukraine. Given record ammonia prices, CF industries would be expected to keep it’s Billingham plant operating but the government has agreed a new deal until the Spring.

 

Read Last Week’s Alpha Bites – Careful What You Fish For

 

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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.