Triple Dip

The COP27 conference in Egypt has again focused our minds on climate change and extreme weather. It is noticeable that the leaders of the three of the biggest polluters – China, India and Russia, have not attended.

The Australian Bureau of Meteorology recently announced that the weather phenomenon La Niña, has formed for the third consecutive year in the Pacific. This is only the third time since records began that there has been three consecutive La Niña events. The first was between 1973-1975 and the most recent 1998-2001.

La Niña is a naturally occurring event, which results in the large-scale cooling of the ocean surface temperature. It is responsible for changing weather patterns around the world, but one of the greatest impacts is above average rainfall in parts of Australia, along with a risk of flooding. Sydney has already broken its annual rainfall record with more than 2.3 metres – three times the London average. La Niña typically increases tropical cyclone activity in the Atlantic and drier conditions in East Africa. A fourth season of failed rains is currently causing one of the world’s worst droughts that East Africa has seen in decades.

Scientists are less certain about how La Niña affects weather in the UK. It is believed to prevent milder prevailing south westerly winds and can cause cold weather. Not what we want to hear given the current energy crisis! Later in winter, La Niña can drive the jet stream further north, increasing stormy conditions and producing heavy rainfall. The Met Office is already warning of the possibility of severe flooding in England in February, despite parts of the country remaining in drought. Will enough rain fall in the right places to replenish water company reservoirs?

Whether the Triple Dip La Niña is down to climate change, we’ll leave for you to decide. However, it could adversely impact global food production and drive food prices even higher which would not be helpful for central bankers who are trying to tame inflation. Kantar’s warning about UK grocery inflation last week (see below) suggests no quick end to the cost-of-living crisis for households.

What have we been watching?

The main focus for investors was the US mid-term elections although this was quickly overshadowed by US inflation which came in slightly below expectations re-igniting market hopes of a possible ‘Fed pause or pivot.’ The Dollar lost ground on the inflation data with Sterling recovering to $1.18. Within risk assets, crypto -currencies suffered another shockwave following a liquidity crunch at FTX and a rival exchange walking away from an emergency bail-out. This, together with the Dollar rolling over, saw global asset allocators begin to switch some of their cash to cheaper markets with the UK mid-cap performing strongly at the end of the week. Global investment sentiment was also helped by news of an easing of China’s covid-19 lockdown restrictions.

The Republican ‘red wave’ in the US mid-term elections was not as strong as had been expected with a number of Trump backed candidates failing to deliver. An adviser told CNN the former president was ‘livid’ and ‘screaming at everybody.’ He has already warned Florida’s Governor Ron DeSantis against running for president in 2024. News that the Democrats have held the US Senate has sparked recriminations within the Republican party.

President Joe Biden said he is planning to meet China’s Xi Jinping at the G20 summit to ask about his ‘red lines’ to reduce the potential for conflict over Taiwan. Xi Jinping has told China’s army that it must ‘comprehensively strengthen military training in preparation for war.’ Meanwhile, the US is preparing to deploy nuclear-capable B-52 bombers to northern Australia.

Russia has pulled its forces out of Kherson, a significant blow to Putin’s standing -how will he respond? It has become abundantly clear that absent battlefield successes, Russia is now going to make the population of Ukraine suffer by conventional attacks on critical infrastructure as winter approaches in an attempt to break their will. Besides acquiring drones from Iran, Russia appears to have purchased Iranian short-range ballistic missiles. President Xi Jinping is reported to have warned Putin against using nuclear weapons in Ukraine. Chinese factories have seen a collapse in orders for manufactured products as European customers preserve cash and a further blow to business confidence from a nuclear strike would cripple many Chinese exporters.

In the UK, retail research specialist Kantar said that grocery inflation hit a record 14.7% and that it was still too early to call the ceiling. This Thursday we have the key Autumn Statement set against the background of an economy now officially contracting. Chancellor Jeremy Hunt has already warned of public spending cuts and ‘tax rises for all.’ Deficit reduction is the major short-term priority.

US inflation in October was below expectation at 7.7% and down from 8.2% in the previous month. Core inflation which excludes energy and food also edged slightly lower in October at 6.3%. Markets responded positively to the inflation data which triggered hopes of a ‘Fed pause or pivot.’ However, one member of the Federal Reserve was quick to warn against an over-reaction to a single data point. ‘We’re going to need to see a continued run of this kind of behaviour and inflation starting to come down before we really start thinking about taking the foot off the brakes.’

China’s exports shrank in October by 0.3%, a steep fall from growth of 5.7% in September and well below market expectations reflecting a weaker global economy and China’s zero-covid lockdown policy. The number of Covid-19 cases continues to grow with Guangzhou, a major manufacturing centre now being affected. However, with the economy under pressure the Chinese authorities have been forced to relax their quarantine rules. Incoming travellers have to quarantine for 5 days and then 3 at home compared with 10 days previously and the same for close contacts of those testing positive. There were also reports of further government support for China’s troubled property sector.

Brent oil dropped back to $92 but then recovered to $95 on news of the easing of some covid-19 restrictions by China.

Finally, a survey by The Money & Pensions Service estimates that a quarter of UK adults might have less than £100 set aside for unexpected bills. This is a disturbing fact given the cost-of-living crisis and recession. Whatever happened to ‘saving for a rainy day?’ Did central bank QE and record low interest rates deter people from saving with such poor returns on cash? Will this attitude to saving begin to change with interest rates now increasing?

Read Last Week’s Alpha Bites – Robots at your Service

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Full version

Site by Lookhappy

Triple Dip

Alpha publications