Putin’s war against penguins

The Weddell Sea is in Antarctica and is governed by The Antarctic Treaty of 1959.

Russian research ships in the Weddell Sea have been collecting seismic data and are reported to have discovered huge oil reserves. The reserves detected are estimated to contain over 500 million barrels of oil, equivalent to ten times the UK’s North Sea oil production over the last 50 years. This is according to evidence recently submitted to the UK House of Commons Environment Audit.

The Antarctic Treaty states that no single country owns the territory and designates the region as a continent devoted to peace and science, meaning that all oil developments are prohibited. Seven countries, including Argentina, Australia, Chile, France, New Zealand, Norway and the UK have territorial claims over Antarctica, but most other countries do not recognise these claims.

The worry is that Russia is collecting seismic data in Antarctica that could be construed to be prospecting, rather than scientific research. A Foreign Office spokesperson said ‘Russia has repeatedly assured the Antarctic Treaty Consultative Meeting that these activities are for scientific purposes.’ This is the same Russia that assured the world that it had no intention of invading Ukraine! Given the deterioration in relations between NATO and Russia and the latter’s closer ties with China, it is ominous that China and Russia have blocked attempts by other Antarctica treaty nations to expand marine protected areas in Antarctica.

Unfortunately, we still need oil while the world transitions to electrification and renewables. Interestingly this long-term structural shift has seen the price of another key natural commodity copper, surge higher. This in turn, has led to a bidding battle, but one for corporate giants. Australian-based BHP bid for UK-quoted, diversified miner Anglo American. BHP has walked away for now, after Anglo’s board re-iterated conviction of its own proposed business restructuring. The real motive for BHP’s bid approach was Anglo’s valuable copper assets, on which Anglo will now focus.

This is not surprising, given some industry experts are forecasting that demand for copper could more than double by 2035, driven by the shift to renewables such as wind farms and electric vehicles!

What have we been watching?

The investor sentiment pendulum swung back towards ‘higher interest rates for longer’ following the recent sticky inflation data. Bond yields continued to rise, overshadowing equities. However, US equities continued to be supported by AI chipmaking giant Nvidia which has risen a staggering 27% over the last month. By comparison with Europe, where interest rate futures suggest a 93% chance of a cut in June, in the UK, the chance of an August cut by the Bank of England has slipped to 32%. In the US, ‘hawkish’ comments from some members of the Federal Reserve (Fed) also added to the uncertainty on the timing of the first interest rate cut. However, at least the Fed’s preferred inflation measure, the core PCE deflator, was slightly better than expectations.

The global geo-political situation remains tense, although a glimmer of hope in the Middle East? The US has ‘every expectation’ that Israel will accept a ceasefire proposal that would begin with a six-week ceasefire in Gaza if Hamas accepts the deal. Meanwhile, Russia is building up its forces for an attack on the Kharkiv region. Ukraine has received NATO member’s permission, and more significantly, approval from the US, to use missiles to strike Russian territory before the offensive is launched. Finally, China has continued to step up pressure on Taiwan following western acknowledgement of the island’s new president.

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In the UK, shop price inflation slowed to 0.6% in May helped by price cuts to bigger ticket items such as furniture and TVs. Food inflation also slowed to 3.2%. Meanwhile, the general election campaign is well underway and as if to confirm the spending pressures for whoever wins, both the Conservatives and Labour have confirmed that income tax thresholds will be frozen until 2028. The IFS estimates this will bring 4.5million more people into higher rate tax threshold by the end of this period.

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Eurozone inflation was slightly ahead of expectations in May at 2.6% but is not expected to de-rail the European Central Bank from announcing a 0.25% interest rate cut later this week. As with other leading economies, the challenge looks to be sticky service sector inflation which increased to 4.1% in May.

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In the US, the PCE deflator, the Fed’s preferred inflation measure was slightly better than expected with the annualised rate at 2.7%.

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China released disappointing PMI business activity data for May with manufacturing dropping back into contraction at 49.5, a worrying development given exports could come under pressure given trade tariffs such as those recently announced by the US.

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Saudi Arabia, Russian and the other members of OPEC+ agreed to extend the current production cut into 2025. However, compliance by some OPEC members remains questionable while weak Chinese economic data overshadowed the news with Brent oil easing back below $81.

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Finally, whoever wins the UK general election faces the challenge of the water sector and specifically Thames Water. The water companies have just submitted their latest capital spending plans for the next regulatory five-year period and the price rises sought to fund these. Regulator Ofwat has delayed its response by a month until after the election but is likely to play hard-ball on planned price increases. There is a risk that Thames Water’s £15bn debt could have to carried across to the UK’s balance sheet if re-nationalised. Given current government borrowing, what a headache for the new Chancellor, which at the present time is looking like Rachel Reeves rather than Jeremy Hunt.

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Read Last Week’s Alpha Bites – Sell in May and go away

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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.