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With Euro 2024 underway, those of you not watching down the local pub will hopefully be following games at home on a large screen TV. However, for those hoping to treat themselves to a new TV or large sofa to watch the football, there might be more of a challenge.

While there are hopes of a peace deal for Gaza, the Red Sea and Gulf of Aden remain dangerous for shipping. Yemen’s Houthi rebels are still attacking despite US air strikes and naval protection. Freight through the Suez Canal is estimated to have fallen by some two-thirds.

The Houthi attacks on ships have forced owners of vessels travelling between Asia and Europe to take the longer route around Africa. The effects of the diversions from the Red Sea, which started in December, are only now becoming apparent with vessels taking this longer route. Typically, UK retailers, have tended to start importing goods from Asia for the November Black Friday and Christmas shopping season between late summer and autumn. However, due to the Red Sea supply chain disruption, some businesses started placing orders in May!

This has knock-on effects for UK importers. The sudden increase in demand has seen the average cost of a shipping container jump in recent weeks to over $4,000. Retailers also need additional warehouse space to store the goods for a longer period, which adversely impacts their cash flow. A lack of stock availability also hits sales. Bigger ticket items such as furniture and electrical goods are the most affected. Retailer DFS recently issued a profit warning partly due to Red Sea shipping delays. Supply disruption could also provide an inflation headache for the Bank of England, if retailers pass on higher supply costs onto customers.

The Bank of England is expected to cut interest rates in August and this should start to lower financing costs for many businesses, although Sterling might weaken against the Dollar, which would be a headwind for businesses importing goods from Asia.

The UK looks as if it is heading towards a new Labour government. However, the Red Sea supply disruption is a reminder for the new government, businesses, and consumers that the UK will still face the economic fallout from events elsewhere in the world.

What have we been watching?

US interest rate policy and European elections were the main features last week, while the AI frenzy shows no sign of abating as Apple helped propel the US market to a record high. Apple rose after announcing it is to enhance its Siri voice and operating systems with OpenAI’s ChatGPT as it seeks to catch up in the AI race. It shares jumped and briefly eclipsed Microsoft to become the most valuable US stock in the ‘three trillion-dollar club.’

After the previous week’s big rise in hourly earnings damaged hopes of an interest rate cut, US inflation in May came in slightly below expectation, but the Federal Reserve (Fed) was ‘hawkish’ as it flagged just one possible interest rate cut in 2024.  Meanwhile, the EU Parliament elections saw a significant shift to the right/populist parties, particularly in France and Germany, and a snap election was called in France. The euro dropped to a one-month low, with Sterling moving above €1.18.

President Joe Biden’s Gaza ceasefire plan was endorsed by the UN Security Council. The vote increases pressure on Israel and Hamas to bring an end to the conflict. However, Hezbollah now appears to be stepping up attacks against Israel from Lebanon after one of its senior commanders was killed by the IDF.

At the G7 meeting, the US pushed for a deal to use the interest from Russia’s frozen assets, thought to be about $3bn a year, to fund interest on new loans to be taken out to fund Ukraine’s war effort. This might provide funding of $50bn but more importantly, would avoid the financial ramifications of seizing $300bn of frozen assets. The US has also broadened its sanctions on Russia, including a fresh crackdown on banks dealing with sanctioned entities.

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In the UK, private sector pay increased by 0.7% to 6.8% in April, although this is the month when the National Living Wage rise took effect. Nonetheless, given the general election, a June interest rate cut from the Bank of England appears off the table. Inflation data later this week should help steer expectations for the likelihood of an interest rate cut in August. Meanwhile, the UK economy hit a speedbump in April, failing to grow after particularly wet weather affected consumer spending.

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The EU Parliament elections saw a significant move to the right and populist parties, particularly in France and Germany. In France, Marine Le Pen’s far-right party won 32% of the vote, and Emanuel Macron has called for parliamentary elections for the National Assembly, to try and gain legitimacy to rule. If Le Pen gains control of the National Assembly it would allow her to control fiscal policy-tax and spending – raising concerns that she would be more free-spending than Macron at a time when France’s deficit is already ballooning. French bond yields climbed higher, reflecting this potential risk, while French equities fell by over 6%. In Germany, the AfD came in second behind the opposition conservative Christian Democratic Union, with the governing party coalition trailing very badly. Far-right parties are expected to hold almost a quarter of the seats in the European Parliament.

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US inflation came in slightly below forecasts at 3.3% in May. Core inflation, excluding food and energy costs, increased to 3.4%. The Fed kept interest rates on hold for a seventh consecutive meeting while dialling back expectations for a cut this year. The ‘dot-plot’ interest rate guidance chart now suggests just one cut of 0.25% this year rather than the earlier three cuts, but it has signalled further cuts of up to 1% in 2025. The Fed raised its median 2024 PCE forecast from 2.4% to 2.6% and its core inflation estimate from 2.6% to 2.8%. With the presidential election in early November to add to the Fed’s challenges, it remains all about economic data watching.

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The Bank of Japan left interest rates unchanged and said that details of cuts to bond purchases would be provided at its next meeting in July, but suggested these could be ‘substantial.’

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Economic data from China continues to be weak. Chinese inflation rose less than expected in May by 0.3%, but factory gate prices were 1.4% lower and have now fallen for the twentieth month in a row. Chinese retail sales picked up in May, growing by 3.7%, but industrial production slowed while urban property prices across the country continued to slide.  

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Brent oil rallied above $82 as the EIA and OPEC+ maintained their global oil demand forecasts for the second half of 2024.

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Finally, the global electric car trade war continues to intensify. The head of the US Senate Finance Committee has expanded an investigation into BMW after it was found to have imported cars into the US that contained banned Chinese parts. The US has already imposed a 100% tariff on Chinese EVs. Meanwhile, with China accused of selling EVs at artificially low prices, the EU said it will impose additional tariffs of between 17% and 38% on Chinese EV imports from July 4^th, ‘should discussions with Chinese authorities not lead to an effective solution.’ Chinese EVs are estimated to be some 25% cheaper, partly due to huge state subsidies. However, this also reflects economies of scale given the size of China’s EV industry, which produces 70% of the world’s EV batteries. In turn, German car manufacturers are heavily dependent on sales in China and could suffer from any retaliatory measures by Beijing.

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Read Last Week’s Alpha Bites – Fast fashion or Pre-loved?

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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.