The JEDI order

Not a new chapter in the film series Star Wars but the saga surrounding the award of a new cloud-based computer contract in the USA, involving no less than President Donald Trump and Amazon founder Jeff Bezos.

The Pentagon has recently awarded a $10bn cloud-computing contract to Microsoft, following a heavily scrutinised bidding process in which Amazon had been seen as the favourite. The 10-year contract for JEDI (Joint Enterprise Defence Infrastructure) is aimed at making the US defence department more technically agile. The Department of Defence wants to replace its ageing computer networks and give its military forces better access to data and the cloud from battlefields.

As the world’s largest provider of cloud-computing services, Amazon had been front-runner ahead of Microsoft, Oracle and IBM until President Trump became involved in the contract award process. Trump has repeatedly criticised Amazon and its founder Jeff Bezos who also owns the Washington Post which, has not been a fan of Trump’s administration. However, Oracle had earlier challenged the bidding process in federal court claiming it was biased in Amazon’s favour.

Artificial intelligence looks to be the latest battleground for technology companies looking to secure mouth-watering long-term contracts for the defence industry. With such big contracts up for grabs, no wonder things have turned nasty and accusations are flying. Analysts have also predicted that Amazon will take legal action against the US government.

In the UK, Boris Johnson and Jeremy Corbyn will be going toe-to-toe in a general election on 12^th December. Is this the ‘new hope’ for Boris Johnson who must believe the ‘force’ is with him, or will the Brexit party and tactical voting by ‘Remain’ parties prove to be a ‘phantom menace’ of the ‘first order’?

What have we been watching?

How quickly sentiment can change in global markets these days. In early September, the yield on 30-year US Treasuries hit an all-time low, partly on fears of global economic slowdown from the US and China trade dispute. Last week, the US SP 500 share index hit a new all-time high. Two extremes of risk aversion and risk appetite in the US in just two months!

The rise in US equities to a new all-time high was helped by a combination of factors including good company results, positive comments about progress on US and China ‘phase one’ trade talks, a widely expected 0.25% interest rate cut from the Federal Reserve (Fed) and finally, positive US jobs data.

President Trump said that progress in phase one trade talks between the US and China is ‘ahead of schedule’. China also appeared to put a positive spin on progress in talks, but towards the end of last week showed signs of dragging its feet. Media reported Chinese officials doubting they will be able to reach a long-term trade deal. Markets continue to appear to care more about a de-escalation of trade tensions between the two super-powers rather than the details of the ‘phase one’ deal. Phase two negotiations regarding longer-term structural issues such as technology and security still have to be addressed and will be more challenging. Investors will also be looking to see if the US removes the planned December tariffs.

In the meantime, an example of tariffs in action. Bloomsbury Publishing, which publishes Harry Potter amongst other titles, is an unexpected victim of Trump’s tariffs. Many of its books destined for the US are printed in China and these became 15% more expensive overnight from 1^st September as new tariffs were implemented.

The UK will see its first December general election since 1923. Whether this reduces the level of uncertainty for holders of UK assets or further increases the range of possible outcomes remains to be seen. Following Theresa May’s experience in the June 2017 election, investors will surely caution against placing too much faith in early opinion polls.

Meanwhile, the UK Budget has been delayed due to the general election. This is frustrating given the Government had hinted at some fiscal stimulus coming for the economy. The Nationwide said that annual house price growth remained subdued in October with solid labour market conditions and low borrowing costs appearing to offset the uncertain economic outlook caused by Brexit. We now wait to see how a December election effects UK consumer confidence in the run up to Christmas.

In Europe, activity indicators for October confirmed that the slowdown in manufacturing is starting to feed through into the services sector. Third quarter economic growth across the Eurozone was 0.2%.

In the US, economic growth in the third-quarter, while slowing compared with the two previous quarters, slightly exceeded expectations at 1.9%. President Trump was quick to claim credit tweeting ‘The greatest economy in American history!’ Consumer spending held up better than expected, offsetting a fall in business investment and lower public spending. However, consumer confidence has since suffered a second straight, if modest, decline in October. As widely expected, the Fed cut interest rates by 0.25% and two Fed committee members dissented, just as they did for cuts in July and September. The Fed has however slightly shifted its future guidance from ‘acting as appropriate to sustain the expansion’ to ‘assess the appropriate path of the target range’. This suggests that the Fed stance on the path of future interest rates is likely to remain on hold going into 2020 but with markets likely to factor in the possibility of more cuts.

In China, Hong Kong moved into recession in the third quarter as the economy shrank 3.2% as the democracy protests adversely impacted tourism and the retail sector. Chinese manufacturing activity in October fell to an eight-month low with domestic and external demand remaining soft.

The Bank of Japan left interest rates unchanged but suggested that cuts are likely in the future.

Brent oil held at $61. While Russia’s deputy energy minister said it was too early for OPEC to talk of deeper oil production cuts while there was a rise in US oil inventories.

Finally, a tale of two cities. A total of 545 houses were sold in England in September with a value of over £1 million. The most expensive property sold was in Chelsea with a value of £17m. The cheapest home sold in September was a flat in Sunderland which went for just £16,000. Sounds a bit like global equities, with the US similar to Chelsea, very desirable but looking expensive and the UK like Sunderland, unloved and relatively cheap.

Read Last Week’s Alpha Bites – Dark Fate – Rise of the Machines

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