Flashpoint

Taiwan’s President Tsai Ing-wen has accused Beijing of purposefully inflaming tensions in the Asian region and over the weekend called for “meaningful dialogue” with mainland China as long as it was willing to resolve antagonisms and improve cross-strait relations. Chinese warplanes recently crossed the sensitive median line across the narrow straight that separates the mainland and the self-governing island almost 40 times in a 48-hour period. China and Taiwan do not have an official diplomatic channel for dialogue so any accidental clash between their fighter jets could quickly spiral out of control.

The incident happened recently following diplomatic visits to Taiwan by US representatives. China has reacted with increasing anger at warming ties between Taiwan and America and has ramped up military exercises in the waters around the island which it views as an inseparable part of its territory despite the two sides having been governed separately for over 70 years.

The US is by far Taiwan’s most important friend and key military ally. The relationship was forged during World War II but more so during the Cold War. In 1979 President Jimmy Carter ended the diplomatic recognition of Taiwan in order to concentrate on developing ties with China. The US Congress responded by passing the Taiwan Relations Act which promised to supply Taiwan with military equipment. The Trump administration agreed an $8bn arms deal with Taiwan last year and is believed to be close to securing a further $7bn deal in 2020. This is thought to include sea mines and coastal defence cruise missiles. Not surprisingly, China has re-acted angrily to this potential defence contract. US National Security advisor Robert O’Brien said last week that China was engaged in a massive naval build up to give it the ability to push America out of the Western pacific and allow it to engage in an amphibious landing in Taiwan.

The weekend’s military parade by North Korea has grabbed the headlines, but there is a real power struggle developing in the South China Sea between China and the US and its allies. Taiwan is not only a key geographic location, but is also a technology and electronics powerhouse with important global component suppliers such as Taiwan Semiconductor. Let’s hope nobody gets trigger happy.

What have we been watching?

Global equity markets were able to shrug off the uncertainty surrounding the US election and the efforts to find common ground on fiscal stimulus last week, with all major indices recording healthy gains.

American investors drew support from President Trump’s return to work although how ill he has been is anyone’s guess. However, be careful for what you wish for, as he announced, via Twitter naturally, that discussions about additional fiscal stimulus would cease until after the election. However, he has suggested a number of separate smaller targeted support measures including help for airlines. Before the Trump tweet, Federal Reserve Chair Jerome Powell issued another warning that recessionary dynamics within the US economy would intensify, if monetary stimulus efforts are not supported by fiscal action. Longer duration bond yields are starting to move up in the US on the prospect of a Biden and Democrat party election win. The US market appears to be pricing perceived election clarity, and with it, a growing likelihood of additional fiscal stimulus -at least in the pipeline.

The WHO estimates that one in ten people worldwide may have had the Covid-19 virus. Meanwhile, the second wave of Covid-19 continues in Europe with cases now rising even in Italy and further light lockdown measures are likely. Hospital admissions are also increasing rapidly although the treatment of the virus has also improved since the first wave. In the UK, a study by ITV News highlighted a spike in cases in a number of areas from areas with universities with 69% of cases in Nottingham from student areas, 74% in Newcastle and 84% in Exeter. In Manchester, the local health authority revealed that over 50% of new cases were amongst the age of 17-21 years. New lockdown rules in England are to be announce by the government later today under a new ‘three tier system’.

The head of the International Monetary Fund (IMF) said the global economy is coming back from the depths of the crisis but this calamity is far from over. While the global economy is in ‘less dire’ shape than it was earlier this year, it now faces a ‘long, uneven and uncertain’ road to recovery’. The IMF also said that the $12trillion in support from governments and central banks had ‘put a floor under the world economy’. However, ‘all countries are now facing the long ascent -a difficult climb that will be long, uneven and uncertain and prone to setbacks. As if to reinforce this message, Spain, which is struggling with a second wave of Covid-19, cut its economic outlook with the economy expected to contract by 11.2% in 2020, compared to its previous prediction of 9.2%. The Bank of France, said that the French economy grew by 16% in the third quarter but it is now expecting it to taper off in the fourth quarter due to the second wave. The economic recovery in the UK also lost pace in August.

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Intensive Brexit talks continue ahead of this week’s EU Summit which would suggest willingness for some sort of trade deal by both the UK and EU although fishing remains a big sticking point.

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In the UK, new car registrations fell to their lowest level for a September in more than two decades. The service sector PMI activity indicator for September at 56.5 was notably higher than the equivalent reading for the Eurozone but remains vulnerable to the withdrawal of government support measures and the possible extension of regional lockdowns. House price growth hit an 18-year high in September driven by pent-up demand, people seeking bigger homes and the stamp duty cut. However, banks are starting to raise interest rates on some 75%-90% LTV home mortgages, while the Halifax has warned of a significant downward pressure on house prices at some point in the months ahead. August’s monthly GDP reading showed the UK’s economic recovery losing pace.

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In Europe, the PMI economic activity indicators appeared to suggest that momentum has stalled but also highlighted wide divergences across countries and business sectors. Germany continued to outperform driven by a pick-up in manufacturing, as did Italy, although Spain fell back into contraction as renewed lockdown measures took effect.

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In the US, President Trump returned to work as rumours continued to swirl over his treatment and extent of his illness. With polls showing him trailing Democrat Joe Biden with less than a month to go before the election, President Trump appears to be re-embracing the risky strategy of playing down the Covid-19 pandemic despite signs it could further diminish his re-election chances. Meanwhile, following a 16-month Congressional investigation into Facebook, Apple, Amazon and Google, Democrat lawmakers have urged changes that could lead to a break-up of America’s largest technology companies.

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China enjoyed its annual Golden Week holiday. Traditionally, China accounts for 20% of the world’s international tourism however due to Covid-19 they are having to travel within the country this year. Some 425million Chinese are thought to have travelled within China in the first four days – what Covid-19 pandemic? However, China has reported that all 9million residents of the coastal and tourist city of Qingdao are to be tested after 6 Covid-19 cases and 6 asymptomatic cases had been discovered. These were traced to a hospital treating Covid-19 patients arriving from overseas.

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Brent oil recovered by more than 10% from its recent low to $42. This reflected disruption to production from a major storm in the Gulf of Mexico and a strike by oil workers in Norway. Meanwhile, OPEC is still in compliance with earlier oil output guidance but it appears production was up by 160,000 barrels a day in September with an increase from Libya and Iran who are both exempt from production quotas.

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Finally, a survey of just under 1,000 UK firms by the Institute of Directors shows that 74% plan on maintaining the increase in working from home. Not good news for city centre service businesses and those dependent upon office workers and commuter footfall.  This comes as Transport for London calls for a further bail out of £2bn to keep buses and the underground running until December. Meanwhile businesses in the North of England wait to see if they will be impacted by the government’s ‘three tier’ lockdown.

 

Read Last Week’s Alpha Bites – Jaws

 

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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.