If you see me, then weep

During Europe’s long, hot summer of 2022, river levels fell alarmingly. The hunger stones in the Elbe River at Děčín in the Czech Republic, are engraved with the words ‘if you see me, then weep’ which were a historic indicator of famine, were once again exposed. A year later and the Amazon River is experiencing record low water levels.

The Brazilian port of Manaus, the region’s most populous city, at the meeting of the Rio Negro and the Amazon River recently recorded the lowest water level since records began over 120 years ago. Some areas of the Amazon have seen the least rainfall between July and September since 1980. The drought has affected the local population as food, drinking water and medicine are transported by river.

Global warming or the El Niño climate phenomenon?

However, it is not just transportation on the Amazon River that has been affected by the drought. The Panama Canal has been affected by highly unusual drought conditions, right in the middle of Panama’s supposed wet season. This has lowered water levels in two reservoirs that supply the canal water lock system. The route is dependent on freshwater, with more than 50m gallons needed for each ship to cross. As a result, the authorities have limited the number of crossings to about 32 a day instead of 36, with vessels queuing to access the waterway.

The problem has brought back memories of the delays at the Suez Canal in 2021 when the crucial waterway was blocked for six days when the container vessel Ever Given ran aground. The Journal of Shipping and Trade estimates that $270bn of goods normally pass through the Panama Canal each year on their way to over 170 countries. The authorities are now considering building a new reservoir in a different region, which could mitigate the lock water supply issue until 2075.

Global supply chains have returned to some normality in the wake of the pandemic but are still vulnerable to more extreme weather events.

 

What have we been watching?

 

Risk sentiment pulled back on geo-political tensions and concerns over the Chinese property sector. Markets remained focused on the Middle East, but hopes that US diplomatic efforts could avoid the conflict spreading were dealt a major blow by the horrific blast at a hospital in Gaza. Brent oil edged above $91 and markets remain concerned that an escalation could drive energy prices even higher with ramifications for inflation. The latest UK inflation data being a prime example. The Palestinian mission to the UK said that given the mounting casualties in Gaza, that the risk of escalation of conflict in the Middle East was ‘nine out of ten.’ To add to market uncertainty, President Joe Biden has called for a further $75bn of extra military support for Israel and Ukraine as Republicans failed once again to elect a Speaker of the House.

Putin met President Xi Jinping in China and will no doubt be feeling smug given the Ukrainian counteroffensive is fast running out of time with winter approaching, higher energy prices and war weariness amongst some Western supporters with the Middle East diverting American resources.

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Average UK pay growth rose above inflation for the first time in almost two years. Wage growth increased at an annual rate of 7.8% between June and August, in line with market expectations. UK inflation in September did not drop slightly as expected but was unchanged at 6.7% as slowing food prices were offset by higher petrol prices. Nonetheless, markets were not too concerned as the October inflation will be far more important as this is expected to decline materially towards 5% as some components drop out compared with a year ago. Petrol prices remain an area of concern, given the events in the Middle East.

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In Europe, expect some political manoeuvring which could go on for a few weeks, but it looks like Donald Tusk will be back in power in coalition with other parties, which should be good news for the EU.

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In the US, retail sales grew at a faster pace than expected in September, increasing by 0.7% on the previous month. The 10-year US Treasury yield climbed above 4.8% on the sales data, matching a 2007 high. Higher bond yields have, in turn, fed through into the housing market, with the typical US 30-year fixed-rate mortgage hitting 8% – the highest level since 2000. US fixed interest investors remain concerned by the scale of government bond issuance in 2024 which could be as much as $4trillion. The failure of the Republicans to elect a Speaker of the House is not helping either. The US is going into an election next year and it is likely that the new president will follow an expansionary fiscal policy in 2025. With deficits already high, who would be the marginal buyer of US Treasuries? Remember that the Fed is now in its QT as opposed to the QE phase. Furthermore, China is reported to have been a recent net seller of US Treasuries taking the nation’s holdings of US debt to a 14-year low.

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In China, there were reports of a run on a regional bank which has lent billions of Yuan to troubled property developer Evergrande. While Evergrande has missed interest payments on some dollar bonds, it is not yet believed to have defaulted on its total debt of $192bn. Both Evergrande and its fellow troubled property developer Country Garden are too big to fail, so will the Chinese authorities try to avoid a ‘Lehman Bros’ moment by putting in new management along with significant state support in a similar manner to the UK with the bailout of RBS? Meanwhile, China’s economy grew by 4.9% in the third quarter of 2023.

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Brent oil edged up to $91 as dealers continued to watch developments in the Middle East.

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Finally, further evidence of how the cost-of-living crisis is affecting some UK households. New figures from The Financial Conduct Authority (FCA) showed that £440m was loaned out to customers pawning goods in the year to June 2023. That is an increase of over 25% on the previous year. The National Pawnbrokers Association said it was the only option for some people who could not get a bank loan.

Read Last Week’s Alpha Bites – The Grey Zone

 

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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.