Over the weekend, Ukraine launched one of its largest drone attacks on Russia since the start of the war, hitting Moscow. It is reported that drones made in the UK were involved.

It demonstrates how much warfare has changed in five years and should be a wake-up call to European NATO governments.

The new methods of warfare are also seeing significant changes within the defence industry. This is reflected in the growth in defence ‘unicorns.’ A ‘unicorn’ is a start-up business venture which rapidly achieves a value of over $1bn. The US has seen an explosion in unicorns in recent years driven by the AI boom. However, the UK is now seeing the growth of its own unicorns in the defence sector as European governments seek to boost defence spending and learn from the drone warfare in Ukraine and the Middle East.

Cambridge Aerospace, a UK defence contractor founded only two years ago, has recently achieved a valuation of £2.5bn following its latest round of funding to support growth. Cambridge Aerospace develops and manufactures interceptor systems for use against drones and missiles. It currently provides interceptors for the UK’s Armed Forces.

The other two UK defence unicorns are UFORCE and Kraken Technology. UFORCE aims to unify Ukrainian defence technology developers and manufacturers into a single platform to deliver proven aerial, maritime and ground unmanned platforms. Kraken Technology specialises in technically advanced littoral, surface and subsurface capabilities. These have been another feature of the war but offshore Ukraine.

Growing defence budgets, increased geopolitical tensions, strong government support and demand for drones, AI and cyber capabilities have led to a record level of defence start-ups so far in the UK. The UK stock market also comprises a number of quoted defence contractors as well as manufacturers who produce high-tech military components for weapon platforms.

This is all a far cry from just a few years ago when, as we highlighted in Alpha Bites, how new ethical investing rules imposed on the financial sector were preventing defence companies from accessing funding from banks or pension funds from investing in the sector!

The defence unicorns and start-ups will be looking to sell their products and capabilities to defence forces globally. However, supplying the UK’s Armed Forces is an important factor in securing orders from the UK’s allies, so the government needs to be as supportive as possible. We wait to see whether new Defence Minister Wes Streeting has any more luck than his predecessor John Healy in convincing new PM Andy Burnham to step up defence spending. Currently, the new PM seems to be focusing his attention on the UK’s cost-of-living.

What have we been watching?

Global equity indices are close to all-time highs but more challenging crosswinds in bond markets. Expectations for a US interest rate hike by the Federal Reserve (Fed) were dialled back last week but have been accompanied by a significant steepening in the US Treasury yield curve. This suggests the longer-term outlook for US interest rates is less positive. Concerns about higher oil prices, elevated government fiscal deficits and the growing demand in the US for capital to fund the massive AI investment boom have been putting upward pressure on bond yields. For example, the US government issued $25bn of 30-year Treasury bonds last week with a yield of 5.2%, marking the highest yield since 2001.

Brent oil moved higher last week, and this morning is steady at $88, reflecting the fact that a further military escalation appears unlikely, at least in the short term. This follows comments from US Treasury Secretary Scott Bessent, who confirmed that the latest phase of the Iranian conflict has shifted towards an economic and physical blockade, describing the measures as a ‘combination of economic isolation like the world has never seen before.’ However, the Gulf region remains volatile and Iran’s Revolutionary Guard are still claiming that no ship can safely transit the Strait of Hormuz without approval. There were also unconfirmed media reports that Iran’s allies in Yemen, the Houthi rebels, had targeted a Saudi Arbian oil refinery.

In the US, the market dialled back its expectations for an imminent interest rate hike by the Fed. Core inflation (CPI) in July slowed to 2.5%, while producer price inflation (PPI) was also lower than expected, holding steady, which meant that the year-on-year reading fell back to 4.7%. US retail sales in July were also weaker than expected, supporting the case to postpone any interest rate hike.

Finally, an AI headache for the government? UK households are increasingly turning to AI to file objections and appeals and seek compensation. The resulting deluge of complaints known as ‘agentic flooding’ risks overwhelming government departments. These range from tax appeals to welfare claims to parking ticket objections. For example, the backlog in employment tribunals is reported to have risen by 55% so far this year!

The post UK Defence Unicorns first appeared on Alpha Portfolio Management.

Despite an air of domestic political and economic gloom, foreign buyers are hoovering up UK quoted businesses at an alarming rate.

In recent weeks, amongst bigger names, Segro, EasyJet, Intertek, Beazley, Rotork, MITIE, Bodycote and DCC have all received bid approaches. This follows the US takeover of Schroders earlier this year.

While, for shareholders, a bid approach is usually a welcome development, for long-term investors, it can also leave a challenge. Can you find a replacement investment of equal quality? Unfortunately, the scale of UK takeovers is shrinking the size and importance of the UK stock market and sadly the hopper is not being re-filled with comparable size new issues.

Where foreign companies are buying UK PLCs, the bid premiums have tended to be very significant, as they are able to derive economies of scale. For example, Rotork received an initial unsolicited bid from Swiss company ABB at 430p, before three further proposals leading to a final offer of 506p – a premium of 70% to the pre-offer share price!

However, some of the current bidders are private equity firms and bids have tended to be opportunistic ‘bear hug’ offers. These are typically at a significant but less generous premium to the share price, which seeks to persuade the board of a target company into recommending acceptance to its shareholders. UK companies have received £44bn of so-called ‘bear hug’ unsolicited offers so far in 2026.

The Stock Exchange’s junior market – AIM – has an even greater challenge partly due to Rachel Reeves’ earlier budget inheritance tax rule change. From a peak of 1,700 companies in 2007, the number of AIM quoted companies has recently fallen to below 600. Unfortunately, besides takeovers, the bigger AIM companies have tended to move up to a full listing. The London Stock Exchange is now attempting to address the decline by streamlining AIM rules to reduce costs and make capital-raising easier.

The London Stock Exchange also faces competition for fund raising from the venture capital sector, which is estimated to have raised $92bn in the last ten years, almost five times that of the previous decade! This allows companies to stay private and is not a UK only phenomenon. According to the Economist, the number of publicly listed US companies peaked at 8,000 in 1996 but stood at around 3,900 last year.

Another reason the London stock market has shrunk is that the UK has failed to attract mega-cap AI listings. However, this might not be a bad thing were the AI bubble ever to really burst as UK PLC, with its typically lower valuations, might be a safer port in a storm.

What have we been watching?

Hopes that the Strait of Hormuz would re-open pushed energy prices lower helping propel European and US equities to fresh highs with the latter also helped by a re-bound in AI companies after a difficult July. Soft US jobs data also saw markets dial back prospects of a US interest rate increase.

However, over the weekend, optimism has waned about an agreement to re-open the Strait of Hormuz and Brent oil has risen modestly to $84.

Last week, markets were more hopeful of de-escalation in Middle East tensions as negotiations between Iran and Oman progressed over the Strait of Hormuz. However, optimism faded as details of a potential agreement raised questions over whether the US would accept the deal and just how free-flowing shipping through the Strait would be. Internal divisions within Iran also appear to be complicating efforts to reach a final agreement. The appointment of former Revolutionary Guard commander Moshen Rezaee to head the Supreme National Security Council has reinforced hard-line influence at the centre of decision-making. A deal to re-open the Strait of Hormuz looks unlikely in the short-term after Iran added six additional conditions to the Iran-Oman agreement that were inevitably unacceptable to the US.

Media reports suggest Iran continues to tie any lasting agreement over the Strait of Hormuz to wider demands on the US, including sanctions relief, compensation for war damage and security guarantees. President Trump said, ‘we are now low keying it’ and not rushing to make a deal or resume military action, preferring instead to continue economic pressure on the regime. Meanwhile, Iran was reported to have attacked an oil tanker attempting to use the Omani shipping route.

US headline payrolls fell unexpectedly in July, leading investors to dial back prospects of an interest rate hike by the Federal Reserve (Fed). The chances of a Fed rate hike in September fell from 72% to 44%. Meanwhile, President Trump is under mounting pressure over the Middle East, but internal opposition appears to be growing ahead of the midterm elections. Some 25 Democrat-led states are suing the Trump administration over his latest 10%-12.5% tariffs. Meanwhile, the Trump administration is reported to have repaid $100bn of the $165bn Liberation Day tariffs collected!

The Japanese yen remained in focus although it was only marginally weaker. Stronger Japanese wage growth and more ‘hawkish’ signals from the Bank of Japan reinforced expectations for additional policy tightening.

Finally, petrol station owners just can’t win. Already taking flak from drivers for profiteering from the war in the Gulf, they are now the victims of fraud. UK drivers are reported to have stolen almost £200,000 of fuel on average every day since the outbreak of the war in Iran. Some people are simply driving off without paying!

The post UK PLC – Year of the Bear Hug first appeared on Alpha Portfolio Management.

The Trump administration recently signed a landmark nuclear agreement with Saudi Arabia, reversing a years-long stance towards a key American ally in the Middle East. Labelled a ‘peaceful nuclear co-operation agreement’ this sits alongside a ‘bilateral safeguards agreement.’

However, has it kicked off a Middle East nuclear arms race?  

It comes in the wake of joint American and Israeli attacks on Iran’s nuclear facilities and Trump’s insistence that Iran can never develop a nuclear capability. This remains one of the many stumbling blocks as the US and Iran seek to end the current conflict in the Gulf.

Signing a nuclear pact in the Middle East will no doubt further raise tensions in a volatile region. Since 2018, Saudi Arabia has demanded that it be allowed to develop nuclear weapons if Iran is allowed to. The details of the nuclear agreement have not been disclosed but are believed not to include strict enforcement measures to block Saudi Arabia from developing a military nuclear programme in the future.

So why a deal now?

The deal would seem to send a signal that the US wants to keep regional allies ‘in the fold’ even if it means angering Israel in the process, as China seeks greater influence in the region. Iran has supported the Yemen-based Houthi rebels, which have attacked Saudi Arabian oil tankers and infrastructure in the Red Sea as it seeks to broaden the conflict in the region. Saudi Arabia has undertaken retaliatory attacks on the Houthi rebels as well as against Iranian proxies in Iraq, so it is another key ally for Trump in the region.

It will take a decade, if not longer, for Saudi Arabia to build nuclear power plants, but the agreement lays the foundations – one day, for a military nuclear capability.

Trump has not only reversed America’s years-long stance towards the Middle East, but he may also have started a nuclear arms race. As if the Middle East was not already dangerous enough!

What have we been watching?

Government bond yields are rising on renewed global stagflation fears due to events in the Middle East, with long-dated yields reaching multi-year highs. Meanwhile, rising concerns about global warming and drought contributed to a further rise in agricultural prices, with wheat climbing by 10% by the end of the month.

Despite this, it was another good week for global equities, although AI companies saw continued volatility. Markets also continued to be dominated by the performance of the mega-caps, a topic we recently covered in Alpha Bites: The rise and rise of mega-cap US technology stocks. For example, last week, the US ‘Mag 7’ jumped by over 4%, as Microsoft and Amazon soared in value by over 21% and 17% respectively, while Apple and Meta fell by 7% and 6%.

Over the weekend, President Trump said he had cancelled the potentially largest American attack on Iran since World War II, following appeals from Gulf states, particularly Saudi Arabia, and announced that fresh US-Iran talks would begin today. At the same time, Iran indicated that negotiations with Oman over arrangements relating to the passage of shipping through the Strait of Hormuz are in their final stages. Hopes of a diplomatic off-ramp to the conflict have seen Brent oil fall this morning by 5% to $83. We have been here numerous times in the past few months, but will a lasting ceasefire be forthcoming this time and will the Strait of Hormuz reopen? Control of the Strait and Iran’s nuclear programme remain key stumbling blocks to any deal.

Some of the recent volatility in AI stocks was partly attributed to the unwinding of a hedge fund, ‘Situational Awareness’, which was reported to be 4-5x leveraged and had taken the wrong view. The value of its funds under management was said to have fallen from $45bn to $10bn over the month. Ouch! Fund manager Citadel was reported to have bought some of its assets at a discount.      

The outcome of events in the Middle East remains vital for the global economy, but particularly the UK. Over the weekend, the EY Club warned that the UK risks sliding into recession in 2027 if the Strait of Hormuz remains closed to shipping while inflation could rise to 6.4%. This comes as the UK farming industry warns the decline in crop yields due to drought and heat could increase wholesale prices for vegetables. Last week, the Bank of England (BoE) kept UK interest rates on hold, and the decision was accompanied by rhetoric that it was not edging towards an interest rate hike. The chances of a UK interest rate increase in September have currently fallen from 60% to 30%. The UK 10-year gilt yield remained just above 5%.

The European Central Bank (ECB) also kept interest rates on hold but signalled that an increase in September was probable. The German 10-year bund yield climbed to a post-2011 high of 3.2% following the ECB meeting.

In the US, the Federal Reserve (Fed) also kept interest rates on hold, but new Fed Chair Kevin Warsh offered little guidance behind this decision. Markets dialled back expectations slightly for a US interest rate increase by the end of 2026. However, concerns about events in the Middle East saw the US 10-year Treasury yield climb above 4.7%.

Co-ordinated intervention by the US and Japanese authorities saw the Japanese yen rally strongly, with its biggest weekly gain against the US dollar in almost two years. This followed comments from US Treasury Secretary Steve Bessent, who said that the yen seemed ‘very undervalued’ and reported that the Federal Reserve had undertaken a rate check on the yen against the euro. Meanwhile, the Bank of Japan left interest rates unchanged at 1% but raised its inflation guidance and indicated further discussions on interest rate policy will be taken in September.

Finally, a glut of power from the UK’s wind farms has added nearly £1bn to energy bills according to researchers. Compensation is paid to wind farm operators for unsold power generated. The problem seems to stem from the construction of wind farms in remote locations in Scotland with inadequate grid connections. Six terawatts of power are estimated to have been wasted in the first half of 2026 alone. Energy bills are a hot potato and a key element in the cost-of-living crisis, so will these compensation payments prove to be an embarrassment for our new PM?

The post Middle East Nuclear Powder Keg first appeared on Alpha Portfolio Management.

In Chinese, Moonshot AI translates to ‘Dark Side of the Moon’, and the company is one of China’s six AI ‘tigers’.

Less than 18 months ago in Alpha Bites’ DeepSeek-AI’s Sputnik moment, we highlighted the shock for America’s AI (artificial intelligence) industry dominance, which was being challenged by China’s DeepSeek-R1.

Now, America’s AI industry has received a further ‘Sputnik’ shock as Chinese AI start-up Moonshot AI has released a large language model with capabilities approaching the likes of US AI pioneer Anthropic.

Chinese AI disruptors are gaining ground in the US. Their AI models appear to be cheaper, open and intelligent.

Chinese AI companies such as DeepSeek and Moonshot are pricing their AI models significantly cheaper yet with performance approaches that of higher-end systems, implying a materially lower cost-to-intelligence ratio. Furthermore, the Chinese AI models are being increasingly released as open-weight systems, allowing developers and enterprises to download, modify and run them locally, whereas US AI companies have largely pursued closed, proprietary models. Moonshot’s K2.6 AI model is reported to be about a third of the cost of Anthropic’s Opus 4.8 model.

Meanwhile, Anthropic has accused the Chinese AI companies of ‘industrial distillation attacks’ on its models whereby Chinese AI labs are training smaller AI models on the outputs of its more advanced systems.

The Moonshot news comes as markets have grown increasingly concerned by the vast sums that some US tech businesses are investing in AI datacentres and AI model development – but without proven returns on capital. The risk is that the new Chinese AI models erode the scarcity premium embedded in proprietary models, accelerating a shift towards commoditisation, leading to tighter profit margins but faster global adoption as open-weight systems lower barriers to entry.

The importance of the Moonshot news should not be underestimated and is a fascinating development to watch. It will no doubt be causing a few sleepless nights for US AI tech owners and investors!

What have we been watching?

Brent oil surged above $100 as fighting in the Gulf escalated into the Red Sea and government bond yields rose on inflationary fears. Fortunately, global equities remained resilient, helped by hopes of rekindled US/Iran peace talks, US earnings, a modest recovery in US AI stocks and UK takeovers. President Trump also announced a new series of global trade tariffs!

After 13 consecutive days and nights of US and Iran tit-for-tat attacks, the US and Iran appear to be holding fire. Trump’s UN envoy said the president was ‘giving talks some space’ while Iran said it had halted retaliatory attacks against the US and its allies in the Middle East. Over the weekend Omani-mediated talks focused on navigation through the Strait of Hormuz. However, US ambassador to the UN Mike Waltz said that US forces remain ‘locked and loaded’ and that Trump is simply giving negotiations more space. Meanwhile, Trump has dismissed US media reports that the pause may reflect pressure on US stockpiles of Patriot missile interceptors, other weapons and a debate by the administration about the cost and effectiveness of further strikes. The situation remains fragile with Trump due to meet Israel’s PM this week and Iran warning it could widen the Middle East war if the US resumes attacks.

This morning Brent oil has fallen 6% to under $91 on hopes that the current pause in attacks, while falling short of a formal ceasefire, at least offers a path for further diplomacy. The main risk for markets remains energy security, both gas and oil, and the fact that shipping through the Strait of Hormuz remains severely disrupted.

Fears remain that the conflict could broaden into the Red Sea. The surge in oil and gas prices last week followed Iran-backed Yemen Houthi attacks on Saudi Arabian oil tankers and energy infrastructure in the Red Sea, which prompted retaliatory strikes by the Saudis. Iran will also no doubt be watching Israeli action in Lebanon as well as the increasing disturbances in the West Bank between Palestinians and Israeli settlers.

While energy prices have fallen this morning, last week’s escalation in attacks in the Middle East saw global stagflation fears resurface once again. Government bond yields move higher on fears that the world could be facing a prolonged inflation shock. This led markets to expect central banks to have to hike interest rates more aggressively. Indeed, market expectations for an interest rate increase by the US Federal Reserve (Fed) moved up from 14% to 38% last week. As a result, there were some big milestones for government bond yields. For example, the US 30-year Treasury real yield, which is adjusted for inflation, hit a post-2008 high of just under 3%. (The 10-year US Treasury yield is trading above 5%). The German 10-year bond yield, at one point, hit a post-2011 high of 3.2%.

In the US, Trump announced a new series of global trade tariffs to replace the temporary six-month ones that expired last week. The new tariffs range between 10%-12.5% and are broadly in line with the previous tariffs. The justification for the new tariffs is that 50 countries are guilty of using forced labour! Another crazy excuse to avoid a legal loophole. Interestingly, some of Trump’s original Liberation Day tariffs are reported to have been refunded with interest at 7%. Some $85bn has been repaid so far, with some estimates suggesting that up to $166bn may need to be repaid. The Liberation Day refunds contributed to a $120bn federal deficit in June compared with a $27bn surplus in the same month last year.

Finally, with more heatwaves predicted, demand for air conditioning is on the increase, but this will require more electricity. However, recent events in France show this may not be as easy as hoped. France derives 70% of its energy from nuclear power, but its ageing nuclear plants rely on water cooling. Rising water temperatures in French rivers have forced EDF to take multiple reactors offline. This led to a surge in day-ahead electricity prices and forced some energy-intensive industries to curtail production.

The post Moonshot AI first appeared on Alpha Portfolio Management.

Events in the Gulf have tended to overshadow the ongoing war of attrition in Ukraine. However, the conflict, now in its fourth year is being felt closer to home for many across Russia.

It is harder for the authorities to ignore the increasing number of Ukrainian drone and missile strikes deep into Russian territory, targeting oil refineries, darkening the skies over Moscow and St Petersburg. Russia, one of the world’s biggest oil producers, is struggling to refine enough fuel to meet domestic demand, leading to big queues at petrol stations.

Ukraine claims to have disabled 43% of Russia’s oil refining capacity. A significant number of Russian regions are experiencing fuel restrictions. It is thought to be affecting 50 million people – c. 35% of the population. This is leading to growing public discontent.

Ukraine has already attacked Russia’s ten largest refineries, but now Ukrainian drones have struck Russia’s biggest oil refinery in Omsk, which is 2,500km from the border. It has also attacked Russia’s shadow fleet, forcing Putin to suspend shipping in the Sea of Azov.

Putin has responded by attacking civilian targets in Ukraine, as its American supplied air defence capability is running low. America is believed to have used half of its Patriot interceptor missiles in Iran and is reluctant to supply more. However, Trump has offered to give Ukraine the right to produce Patriot interceptor missiles under licence to help defend Kyiv, but how easy this will be to do remains to be seen. At least it marks a shift by Trump away from Putin and towards Zelensky.

Tump continues to vent his frustration at his European NATO allies, many of whom, including the UK, are not ramping up defence spending as fast as he would like. At the recent NATO leaders’ conference, he warned that the US ‘could remove all our soldiers from Europe.’ He also continues to hope for a possible meeting between Putin and Zelensky to end the war in Ukraine. With so little trust between Ukraine and Russia, a lasting peace deal still looks like a long stretch.

Meanwhile, Trump continues to struggle to bring Iran to heel and is facing further US armed personnel fatalities. The escalation in the Gulf once again elevates the risks of global stagflation and nobody wants that!

What have we been watching?

The escalating conflict in the Gulf which has reignited fears about global stagflation together with fresh concerns around the US AI trade given the competitive threat from Chinese AI business models. The Philadelphia Semiconductor Index fell by almost 10% last week, marking the biggest weekly decline since Trump’s Liberation Day tariff announcement last year.

The conflict in the Gulf has intensified markedly over the weekend as the series of tit-for-tat attacks between the US and Iran continued. Three US service personnel were killed in separate Iranian missile attacks in Jordan and Iraq, while US strikes hit targets in multiple locations, including Iran’s main oil export facility on Qeshm Island. At the same time, Iran has broadened its retaliatory attacks beyond military sites, targeting critical infrastructure across the Gulf, including power and desalination facilities in Kuwait. More alarmingly, tensions have also escalated in the Strait of Hormuz, with Iran signalling a more assertive stance over shipping flows and claiming to have intercepted or attacked shipping attempting to transit the waterway. Prospects for any diplomatic breakthrough remain dim with Iran’s foreign minister suggesting that some nuclear issues ‘remain unresolvable.’  Iran has also asked Yemen’s Houthis to stand ready to close the Red Sea to oil shipments if the US hits Iranian power facilities.       

Following 9 days of US attacks on Iran and retaliatory strikes, Brent oil saw its largest weekly increase since April, rising by over 15%. This morning, following the further escalation over the weekend, Brent oil has climbed a further 3% to over $90. European gas prices have also started to rise again as concerns grow about gas production facilities in the Gulf region.   

In the UK, Andy Burnham takes office as Prime Minister today, with ministers to be appointed and policy plans starting to take shape. Markets are expecting the government to move further to the left, so the question is how far? The new PM is expected to take a more pragmatic approach to North Sea oil and gas given events in the Gulf. Meanwhile, the UK economy was a touch firmer than expected in May as GDP ticked up 0.1%, helped by a bounce in activity in the service sector.

In the US, softer than expected inflation data, with the CPI increasing by 3.5% in June, saw markets dial back the prospect of an imminent interest rate hike by the Federal Reserve.

China’s economy grew by 4.3% in the second quarter, which was down from the 5% growth seen in Q1. Domestic demand remains a major area of concern for the authorities, albeit exports remain strong, helped as China continues to flood markets with cheap EVs.

Finally, Elon Musk’s SpaceX recently became the largest ever initial public offering and its shares shot up from $135 to an intraday high of $225 in a very short time. Many US investors saw SpaceX as an AI play, as earlier this year it acquired Musk’s start-up xAI, best known for the chatbot Grok. However, its main business is the manufacture and launch of rockets and communications satellites called Starlink. At the beginning of this month, Starlink announced it was cutting the price of its services in Memphis, Tennessee, amid local concerns over a massive data centre project. This, together with volatility in AI stocks, has seen SpaceX shares fall by 45% from their peak. SpaceX currently operates at a loss on $18bn of revenue, but Musk is targeting $1trillion of revenue by 2030 – a fifty plus fold increase. Now that is shooting for the stars!

The post Russia’s Fuel Crisis first appeared on Alpha Portfolio Management.

Millions of drivers who were mis-sold car finance agreements will have to wait until at least 2027 to receive compensation, the Financial Conduct Authority (FCA) has announced.

Originally, it was thought the matter could be resolved by the summer of 2026, but ongoing disputes from lenders mean that payments might not be made until 2027 at the earliest.

Over 10 million motor finance agreements could be incorrect, with the average compensation payment estimated to be about £829 per customer and a total payout of over £7.5bn. Some of the banks and finance companies involved will also face a further £1.6bn of costs.

The car finance scandal centres on undisclosed commissions paid by car lenders to car dealerships when they offered loans to customers. In 2021, the FCA banned deals where car dealers received commission from lenders, based on the interest rate charged to the customer. Compensation may still be due to many of those who took out a car loan between April 2007 and November 2024, but the outcome remains very unclear.

The FCA has now received legal challenges from three lenders: Volkswagen Financial Services, Mercedes Benz Financial Services and Credit Agricole Auto Finance. The UK’s Upper Tribunal has agreed to hear the legal challenges to the compensation scheme, either in December or February next year.

The current car finance compensation scheme is nowhere near the size of the earlier car Payment Protection Scheme (PPI) mis-selling scandal, which amounted to £38bn. Nonetheless, a £7.5bn boost to consumer spending would be most welcome, so the delay in compensation due to the legal challenge is frustrating. When it comes to the UK economy, every little helps!

What have we been watching?

An increasingly fragile US-Iran interim peace agreement following more tit-for-tat attacks over the weekend. The US insists the Strait of Hormuz is open, despite Iran saying it has closed the waterway. This morning Brent oil has jumped 4% to almost $97. While Trump called Iran ‘scum’ and said the ‘ceasefire is over,’ he has said subsequently that talks will continue and that mediators are trying to revive the peace process.

Golbal semiconductor stocks steadied last week following the strong reception for chipmaker SK Hynix’s ADRs in the US, which valued it at over $25bn and news that Micron is planning to increase investment in its US plants by an extra $50bn to $250bn by 2035, (see Alpha Bites -The AI ’Gold Rush’ – picks and shovels). However, investors remain concerned that the AI semiconductor chip cycle may be nearing its peak, prompting continued exceptional volatility in chip manufacturers. For example, this morning SK Hynix shares have fallen over 15% – its biggest decline on record – as South Korean investors have been selling. This, together with a sharp fall in chipmaker Samsung, it has seen the South Korean KOSPI index tumble. Today’s sell-off would appear to dash hopes that SK Hynix’s US ADR listing would help revive the South Korean market, which now stands about 27% below its record intraday high of mid-June.     

Over the weekend, the US carried out strikes against multiple targets in Iran. In turn, Iran launched attacks against US targets in Jordan, while the UAE, Qatar, Kuwait and Oman responded to missile and drone attacks.  The latest hostilities were sparked after the IRGC said it had fired a naval cruise missile at a vessel that was attempting to sail along an unapproved route through the Strait of Hormuz. US media reported that Iran told American officials the attack had been a mistake and carried out by a rogue internal group. Markets continue to hope that a peace deal is possible, but with so little trust between the two sides, this currently looks like a big ask and the risk remains of the conflict escalating.

Control of the Strait of Hormuz remains one of the biggest sticking points and the US insists Iran does not control this vital maritime corridor. Trump claims to be ‘beating them up’ but will be mindful that the US midterm elections are looming on the horizon and US voter approval for the war in the Gulf remains low.

At the NATO leaders’ summit, Trump said that the US ‘could remove all our soldiers from Europe’ and reiterated his desire for Greenland to be under US control.

In the UK, PM in waiting Andy Burnham is reported to be considering an expanded budget this autumn, possibly in October, combining the fiscal statement with a departmental spending review. This is expected to set his political strategy until the next election. Chancellor Rachel Reeves is expected to be replaced, with Energy Secretary Ed Miliband seen as the front runner to succeed her.

UK media is awash with rumours of a potential £38bn Burnham tax raid. Possible measures include increasing the additional rate of income tax from 45% to 50%, replacing council tax with a land value tax, a new ‘care levy’ of up to 10% on the value of estates after death, reforming capital gains tax rates, and imposing national insurance on landlord rental income.  Andy Burnham has also promised the ‘biggest council house building programme since the postwar period.’  However, as with Rachel Reeves’ two previous budgets, the uncertainty in the lead up to the latest one is likely to overshadow UK economic activity. Given the renewed uncertainty in the Gulf and taxing questions at home, the 10-year Gilt yield rose back above 4.9%.         

The Japanese yen strengthened and bond yields moved lower after Japan’s finance minister spoke of plans to encourage pension funds to increase investment in domestic fiscal assets.

Finally, ‘America First’ and never mind the rest of us. Trump’s tariff threats have seen British companies ramp up capital investment by 23% in the US in the last year. Companies spending on new production facilities in the US include Diageo and JCB, but the biggest are the UK pharma giants AstraZeneca and Glaxo. These businesses are no doubt attracted to the US by the size and growth of the US economy, but the tariff threat makes the investment decision easier. While the UK has a low tariff of 10%, Trump has threatened to increase it on multiple occasions.

The post Car finance mis-selling – stuck in a jam first appeared on Alpha Portfolio Management.

In one of his last acts as PM, Sir Keir Starmer’s long-awaited DIP – Defence Investment Plan – has been released in time for the NATO summit in Turkey this week.

Delayed by nearly a year, it has created uncertainty for UK defence contractors and ultimately led to the resignation of John Healey as Defence Secretary.

The DIP will see an additional £15bn of defence expenditure by 2029-30. John Healy had stated the UK’s armed forces require at least £28bn. Under the new plan, defence spending will only rise to 2.7% of GDP by 2030. Many other NATO members have committed to increasing defence spending to 3.5% by 2035. Much of the pressure to ramp up defence spending has been driven by the threat from Putin but also Trump’s ire and wanting European NATO members to ‘step up to the plate.’  Trump will be attending the latest NATO summit, so expect plenty of headlines!

Within the DIP, plans to replace the Royal Navy’s ageing Type 45 destroyers have been cancelled in favour of building six new modern ‘hybrid vessels’ equipped to deploy uncrewed drones in the air, on the surface and under the sea. These are expected to be built and delivered sometime in the 2030s. These will be deployed to counter Russian activity in the North Atlantic and High North to protect critical infrastructure and enhance NATO deterrence.

There is no doubt the face of warfare is changing rapidly, particularly with the use of air and undersea drones in the war in Ukraine as well as damage to underwater infrastructure. The war in the Gulf has also highlighted the need for drone and missile defences, which has seen Trump looking to build America’s ‘Golden Dome’ missile defence system.

If, as expected, Andy Burnham becomes the UK’s new PM next month, he will inherit a reported £4.7bn shortfall to fund the DIP. Cuts to some road-building projects and savings in energy security and net zero are expected to help, together with efficiencies in buying new defence equipment.

Will this be enough?

Whoever is PM will face the same challenge as their predecessors – being constrained by high levels of government borrowing. The new PM faces the poison chalice of welfare spending, even more tax hikes or attempting to borrow more. Financial markets will be watching Andy Burnham like a hawk.

What have we been watching?

Positive headlines on US-Iran talks, some ‘dovish’ central bankers at the Sintra Forum, a positive week for US equities but another poor one for US semiconductor stocks where AI uncertainties remain.

Brent oil dropped to a 4-month low below $72. This has followed positive headlines on the US-Iran talks. President Trump said that ‘They’ve had very good meetings,’ while Vice President JD Vance said, ‘Negotiators are sitting down with the Iranians, the Qataris, and with others in Doha, talking about some other details here.’ However, what might happen is still unclear. For example, take the thorny issue of passage of the Strait of Hormuz, where media reports suggest several European nations have accepted that shipping passing through would have to pay fees to Iran and Oman. Clearly, we will not be returning to the status quo that prevailed before the conflict began.

New Federal Reserve (Fed) chair Kevin Warsh, speaking at the Sintra Forum, said that inflation risks had come down. This, together with weaker than expected US jobs data, led the market to lower the chance of a rate hike by the Fed in July from 30% to 22%. More significantly, it also saw the size of potential future interest rate hikes from the Fed by December lowered to 0.3%. Against this ‘dovish’ news were media reports that Trump is actively exploring ways to reshape the Fed by removing or replacing key officials.     

The head of the European Central Bank (ECB), Christine Lagarde, was also speaking at the Sintra Forum and said that the upside inflation and downside growth risks ‘are probably more balanced than before.’ However, European ‘flash’ June inflation data was softer than expected at 2.8%, as was core CPI at 2.4%. This led markets to expect the ECB to be more ‘dovish’ in the months ahead, with just a 0.2% rate hike possible by December. This pushed European equities to a new record high.

In the UK, it doesn’t look like Andy Burnham will see a challenge, so he should become the new PM before the end of July. That removes the period of uncertainty before the market hears more on policies. He has been, so far, keen to repeat that he will abide by the existing fiscal rules. The likely new chancellor is an important unknown for financial markets.

Finally, while Trump has been trumpeting his success in reopening the Strait of Hormuz, a reminder that bringing Gulf gas and oil production facilities back online will be challenging. A recent explosion at Qatar’s Ras Laffan – the largest LNG (Liquefied Natural Gas) plant, accounting for one-fifth of global production – injured numerous workers as they tried to restart production. The plant had previously sustained heavy damage from Iranian drone and missile attacks.

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Trump’s Gulf war sent petrol and diesel prices soaring. This has prompted many vehicle owners to consider the merits of owning a battery-powered hybrid or electric vehicle (EV).

The latest UK car sales data confirms the increase in EV sales. In May, sales of EVs outsold new petrol cars for the first time. There are now more than ten Chinese manufacturers selling cars in the UK, with price being a key driver. A very competitive domestic market has forced Chinese EV manufacturers to seek new markets such as the UK. Chinese brands are rapidly increasing market share and now account for approximately 30% of all UK electric vehicle sales. Five years ago, the figure was just over 1%.

This comes as the government continues to court the Chinese EV manufacturers. The government’s message is that ‘Britain should not fear the rise of Chinese EV imports.’ One suspects that this is because it is hoping the Chinese will copy what Japan’s car industry did in the 1990s and invest in UK car production. Spain has been able to attract major Chinese factory investment – but has the UK been hampered by Brexit?

Meanwhile, the government has recently signed off on £380m of grant support for the new Agratas electric vehicle battery facility in Somerset that will go towards powering Jaguar Land Rover’s (JLR) EV fleet. Hopefully, this should keep the UK at the forefront of battery technology, and it means JLR will be able to keep exporting to the US with a made-in-the-UK battery. However, the government has announced a review of its previous 2030 ban on petrol cars as consumer demand for EVs is behind where it should be to meet the mandate. A consultation process is now underway.

For now, Chinese EV manufacturers seem to be content to invest more in car dealership networks and marketing across the UK to increase sales penetration. Unlike the US and EU, which have imposed tariffs on Chinese EVs, the UK has opted not to, citing consumer choice. There is no doubt the Chinese EV industry has received significant government support and has benefited from China’s stranglehold on rare earth minerals and economies of scale in battery technology.

One other factor that gives China’s manufacturers a major competitive advantage is its lower energy costs. While the UK government might welcome Chinese EV imports to hit its environmental targets, perhaps it is worth remembering that while China has invested heavily in solar and wind power, it still has over 1,100 coal-fired power stations operating, which account for over 50% of global coal electricity generation. Perhaps those Chinese EVs are not as environmentally friendly as first impression?

What have we been watching?

The US-Iran peace framework, hanging by a thread and global tech sell off!

Tensions in the Gulf continued to escalate last week with a series of tit-for-tat strikes around the Strait of Hormuz despite a fragile peace framework. This began with attacks on commercial shipping by Iran, prompting US strikes on Iranian-linked targets, while Iran responded with missile and drone strikes on US-linked sites in the Gulf, including bases in Bahrain and Kuwait. Meanwhile, Israel carried out air strikes against Hezbollah in Lebanon while Hezbollah rejected a US-brokered agreement with the Lebanese government.

However, while the threat level in the Strait of Hormuz has been raised to ‘substantial’ by the Joint Maritime Information Centre, overnight developments suggest a tentative de-escalation, with the US and Iran reportedly agreeing to halt further attacks ahead of renewed talks in Doha this week. This morning Brent oil has edged up slightly above $72 as traders continue to hope that the peace framework holds. However, difficult discussions remain ahead, particularly around control and potential costs for shipping transiting through the Strait of Hormuz while the situation in Lebanon between Israel and Hezbollah remains a concern.

Last week saw a global tech sell-off with ‘tech heavy’ indices such as South Korea suffering along with the US, where the ‘Mag 7’ entered correction territory following a fall in value of over 10% from its May peak. Japan also suffered as Softbank fell on news that Open AI might delay its listing until 2027. Apple fell after announcing its intention to raise the price of its Macs and iPads in response to a surge in demand for memory and storage (see our earlier Alpha Bites – Ram Raid). This has raised concerns that AI datacentre demand is generating inflationary pressures.

Global trade tensions also continue to rumble on. Trump threatened to impose 100% tariffs immediately on any European country that introduces a digital services tax on US technology such as Apple, Google, Meta and Amazon. Britain already has a 2% digital services tax in place, while France, Italy and Spain have a 3% digital services tax. Meanwhile, China added some 20 Japanese companies to an export control list that prohibits Chinese firms from selling dual-use products to those companies that might have military applications. This includes rare earth materials, batteries and semiconductor chip-making equipment.

In the UK, all eyes are upon new MP Andy Burnham. He is planning his ‘big speech’ today and is expected to re-commit to the fiscal rules with devolution as the main strategy for economic growth. Further details of the fiscal plans of the presumptive PM are expected over the coming days as nominations for the Labour leadership contest close on 9^th July. Markets will be watching very closely to see who will be appointed as new Chancellor. Whether regional devolution can drive UK economic growth remains to be seen. Certainly, Andy Burnham has worked wonders for the Manchester area, but against this there is little evidence that a devolved Wales or Scotland has experienced higher growth than England.

In the US, PCE inflation data, the Federal Reserve’s (Fed) preferred inflation measure, was softer than expected in May and as a result, markets dialled back interest rate hike expectations. The scale of anticipated interest rate increases from the Fed by December has edged back from 0.4% to just over 0.3%.

Finally, an example of why the transition to renewables is not straightforward. Tata Steel has warned that its new £1.25bn electric steel-making furnace in Port Talbot could be delayed by eight months. This follows an announcement from National Grid that its connectivity project has been delayed. This involves the construction of two new substations, the installation of transformers, as well as laying 2 km of underground electrical cables. Quite a shock for this government-backed project to modernise steel production in South Wales.

The post To EV or not EV… first appeared on Alpha Portfolio Management.

The term ‘picks and shovels’ originates from the California Gold Rush of the 1840’s.

Where the real fortunes were not made by the prospecting gold miners, but by those selling the tools and supplies necessary for mining.

Today’s gold rush is the boom in AI – artificial intelligence driven by the massive investment by the American AI hyper-scalers in data centres. For example, Alphabet, Microsoft, Amazon, Meta and Oracle are forecast to undertake £700bn of capital investment in 2026 alone. According to US government data, monthly spending on data centre construction in the US hit $50 billion in April!

While the share prices of many AI companies have soared in the past 12-18 months, so too have the share prices of many traditional industrial engineering, utility and mining companies that supply the modern-day equivalent of ‘picks and shovels’ for data centres.

AI data centres are more complex than traditional cloud storage data centres which has led the ‘Big Tech’ companies to seek specialist suppliers. For example, AI servers must be more tightly linked together, increasing the need for advanced cabling and optics. AI data centres also require much greater amounts of electricity to power them, fuelling demand for specialised power management, high-voltage electronics and cooling technologies as well as electricity! Air conditioning and liquid cooling technologies to prevent AI chips from overheating are also in demand. Meanwhile, there has been a surge in orders for gas turbines due to the demand for back-up or off-grid power supplies.

Many traditional engineering businesses have repivoted activities towards providing AI datacentre equipment to benefit from the AI datacentre gold rush. Part of the appeal is also the faster speed with which AI data centre investment projects are moving compared with traditional industrial clients.

The billion-dollar question is, can the wave of AI datacentre investment continue?          

The answer is nobody really knows, but AI fever continues to grip global stock markets. However, the escalating ramp-up in capital expenditure is a growing concern. Nonetheless, the management teams of many traditional engineers, utilities and miners believe that AI demand is a long-term structural growth trend rather than a short-term cycle. In the meantime, many are making hay while the sun shines and profiting from selling plenty of ‘picks and shovels’ to the AI gold rush miners!

What have we been watching?

Fragile peace in our time!

Encouraging progress in the US-Iran peace talks in Switzerland, mediated by Qatar and Pakistan, has seen both sides agree to a roadmap towards a potential deal within 60 days. Technical working groups have been formed and a mechanism has been established to de-escalate the conflict in Lebanon, while a direct communication line has been set up aimed at avoiding incidents and keeping the Strait of Hormuz open. This morning Brent oil has moved lower, falling to below $80. 

This has come as welcome relief to markets this morning after Saturday’s confusion, when Iran suggested the Strait of Hormuz was now closed again after Israeli attacks in Lebanon and it briefly stepped back from talks following renewed threats from President Trump, who reiterated that the US would strike again if Iranian-backed proxies in Lebanon continued attacks on Israel. While difficult discussions remain ahead for the US and Iran, the situation in Lebanon looks to be the most challenging. The head of Hezbollah has demanded that Israel leave Lebanon, while PM Benjamin Netanyahu has said that Israel will not give up any of the territory that it has occupied!

In the UK, this morning has seen the resignation of PM Sir Keir Starmer following leadership rival Andy Burnham’s by-election win last week. If, as expected, Andy Burnham becomes the new PM by September, then this will be the UK’s seventh PM in ten years, or since Brexit! The key for markets now is who Andy Burnham will appoint as Chancellor, with a high-spending candidate like Ed Miliband causing concern, although there are rumours that Yvette Cooper or Wes Streeting could be more market-friendly options. Only time will tell, but previous new PMs and Chancellors have arrived in post with great hopes, but then the lack of economic growth and the financial realities hit. As was clear from the public sector borrowing data last week, the fiscal constraints facing the UK remain unchanged, whoever is PM or Chancellor!  The 10-year Gilt yield spiked 0.98% to almost 4.85% on PM Sir Keir Starmer’s resignation announcement.        

In the US, while inflation expectations have fallen following the tentative US-Iran peace deal, the Federal Reserve’s (Fed) latest meeting last week led to a more ‘hawkish’ shift by markets on interest rate policy. Half of the eighteen Fed officials signalled that there should be an interest rate increase this year, although new Fed Chair Kevin Warsh did not submit a view this time. However, the new Fed Chair did reiterate the Fed’s inflation target, pledging to return inflation to target after five years. This led the market to price expectations for a Fed rate hike by December with the likely increase shifting up from almost 0.2% to approaching 0.4%.              

The Bank of Japan delivered a 0.25% interest rate increase as expected, taking its policy rate to a post-1995 high of 1%.

Finally, is the UK PLC up for sale? Sadly, a trend which has gathered pace since Brexit. Overseas buyers are snapping up ‘cheap’ British companies at a record pace. According to the London Stock Exchange, a renewed burst of deals has pushed the value of acquisitions by foreign buyers to £128bn so far this year, more than triple the level in the same period last year. Compared with the US, which recently saw the record SpaceX IPO, the UK has seen little new issue activity to refill the hopper as UK companies continue to disappear from the market.

The post The AI ‘Gold Rush’ – picks and shovels first appeared on Alpha Portfolio Management.

A new phase of the natural weather phenomenon El Niño – the strongest in decades, could begin very soon, the UN has warned. This will drive more extreme weather around much of the globe and boost temperatures on a planet already under strain from climate change.

An El Niño forms when a switch in wind patterns allows warmer waters to spread across the tropical Pacific Ocean. While an El Niño weather event has been expected, scientists believe it could be unusually powerful, even a record event or a ‘super’ El Niño. It’s predicted to have an adverse effect on UK weather in early 2027.

El Niño will have a global impact but typically fuels hot, dry weather in parts of South America, Southeast Asia and Australia, raising the chances of droughts and wildfires. It can weaken the Indian monsoon and bring drier conditions to parts of Africa. Meanwhile, heavier rainfall can increase the risk of flooding in the southern US.

Why should we be concerned?

This El Niño weather event is expected to exacerbate the global food supply situation and drive the price of some key commodities, such as soy, higher. The UK is reliant on imports for two-fifths of its food supply, while English farmers have faced three of the worst harvests in the past five years. With soy harvests expected to be lower, prices for animal feed will go up, with costs pushed on to consumers.

Global food production is already at risk due to Trump’s Gulf War. Besides the spike in energy prices, the Middle East is a major producer of fertilisers, with 35% of the global exports of urea, a widely used nitrogen fertiliser, passing through the Strait of Hormuz. The UK imports about 60% of its fertilisers. The impending peace deal between the US and Iran should alleviate the fertiliser issue, although, it will take 30 days to clear mines from the Strait of Hormuz and potentially years to rebuild damaged infrastructure in the region.

While a peace deal and reopening of the Strait of Hormuz is a very welcome headline news, a possible Super El Niño weather event will not be for the government facing an ongoing cost-of-living crisis or the Bank of England monitoring the inflation outlook.

What have we been watching?

Peace in our time! (with apologies to British PM Neville Chamberlain)

After 107 days of conflict and a seemingly endless number of false dawns, it looks as if we finally have a peace deal between the US and Iran which will lead to the reopening of the Strait of Hormuz. As we write this morning, risk assets have moved higher, Brent oil has fallen 4% to $83, while the two-year UK gilt yield has dropped to a two-month low of 4.77%.

The peace deal is to be signed on Friday in Switzerland. According to Iranian state media, the agreement includes a phased lifting of US sanctions on Iranian oil exports, the unfreezing of $12bn in overseas assets, and a commitment to reopen the Strait of Hormuz within 30 days, after mine clearing. The US will also end its naval blockade of Iranian ports. The deal also sets out a 60-day negotiating window during which Iran’s nuclear programme will be discussed. Tehran is expected to commit to maintain its current status and not pursue nuclear weapons.

While the peace deal is good news for markets and there is relief all around this morning, is the Middle East really any safer following the US and Israeli strike on Iran? Trump will be relieved given the US midterm elections are looming on the horizon. However, there are tough conversations ahead over the next 60 days and will the peace deal be sustainable? For example, the US Senate will need to approve any extensive sanction relief for Iran. More significantly, what about Israel and Hezbollah in Lebanon? If either were to undertake further strikes against one another, would Iran attempt to close the Strait of Hormuz again?

In the US, SpaceX’s market debut was a monumental event, marking the largest IPO (Initial Public Offering) ever completed and the company’s market value has since surpassed $2 trillion. (please see last week’s Alpha Bites for the ramifications of the sheer scale of this IPO). However, there was uncertainty for US tech companies and assumptions about the breakneck speed of AI adoption. On Friday, the US government issued a temporary export control directive forcing Anthropic to restrict access to its most advanced AI models due to undefined security concerns. These AI models had been released to great acclaim last week to US nationals. As it is operationally difficult to separate users by nationality, Anthropic opted to suspend access to these AI models on a global basis. All eyes now on the US government and Anthropic to see what they agree on as the next step!

The week ahead will see a number of key central banks making interest rate decisions. The US-Iran peace deal should help ease fears about a stagflationary shock to the global economy. For example, at the start of last week, markets were fully pricing in the prospect of the US Federal Reserve (Fed) increasing interest rates by December, but this has now lowered considerably. Elsewhere, the Bank of England is expected to keep interest rates on hold, while the Bank of Japan is expected to announce a further rate increase as part of its gradual normalisation process.

The peace deal will also be welcomed by the UK government after the UK economy shrank by 0.1% in April. However, is PM Sir Keir Starmer living on borrowed time? Following last week’s resignation of two defence ministers, we have the Makerfield by-election on Thursday, with the latest polling showing Labour’s Andy Burnham currently slightly ahead of Reform UK.   

Brent oil has dropped 4% this morning to $83 on the peace deal. However, clearing the backlog of oil tankers and removing mines could take weeks while restoring damaged oil facilities will take considerably longer.

Finally, more winners and losers from Trump’s Gulf War. Tour operators are not only having to contend with jet fuel availability and consumer hesitancy but also changing holiday habits. Due to the Iranian drone and missile strikes, Dubai International Airport saw passenger numbers fall by 66% in March. However, Spain saw a 5.2% increase in visitor numbers in April to a record 9.1 million. Holidaymakers want sunshine, not short-range ballistic missiles!

The post A Super El Niño – are you prepared? first appeared on Alpha Portfolio Management.