PM Andy Burnham has stated the 2016 Brexit referendum was targeted by Russian ‘state-sponsored interference.’  MI5 chief Sir Ken McCallum has subsequently reaffirmed there was Russian involvement but that ‘Russia did not sway the Brexit vote.’  Russia was accused of interfering in the 2016 US presidential election, so anything is possible, but the PM’s comments have re-ignited the Brexit debate once again.

This follows Andy Burnham’s recent speech to the Labour Party conference in which he warned that the current Brexit settlement was damaging the UK economy and promised a national debate about options for future relations, a ‘Bre-union,’ ahead of a major UK-EU summit in November. His comments have also reignited the hopes of the SNP, whose leader John Swinney has said that the ‘Scottish referendum campaign has already begun.’

Andy Burnham’s comments have been welcomed by many European leaders and pro-EU pressure group, Best for Britain, said fears that the UK re-accession process would be bitter and take a decade were overblown, citing Finland’s completion of its EU joining process in less than three years. To rejoin the EU would require the British government to apply under Article 49 of the EU treaties, triggering a process which London would need to negotiate across 35 different chapters of law. Once agreed, membership would need to be approved by existing members of the EU and then ratified in national parliaments.

Following Andy Burnham’s speech, polling by YouGov found that 52% of Britons would vote to rejoin the EU and 27% would vote to stay out. More than 20% of 2016 ‘Leave’ voters would now vote to rejoin.

Andy Burnham has said that he intends to stick to the current Labour manifesto – for now and cannot fully deliver on his ambitions until 2029, the next scheduled election.

Might we see an earlier UK general election, if Labour moves into a clear lead in the polls?

Could the next general election effectively become a second EU referendum with Labour proposing rejoining against Nigel Farage’s Reform stay out?     

What have we been watching?

Yet another sharp sell-off in the semiconductor sector as concerns over the future profitability of AI continued to weigh on technology stocks driven by concerns about US datacentre builder and operator CoreWeave. The weakness in technology helped support broader market performance and more traditional sectors, including the UK market, which has relatively limited exposure to AI capital spending. AI worries also helped to drive a decent rally in government bonds, although concerns remain about France. Inflation concerns are still an issue in Europe as energy prices, both oil and gas, remain elevated.      

Brent oil climbed almost 5% last week to $109, although as we write this morning, is off 2.5% at $107. Of equal concern for European economies is the price of natural gas, which last week hit the highest level since 2022, touching over €87.5 per MWh.   

Last week saw a sell-off in AI-related assets, with semiconductor chip stocks being particularly hard hit, with the Philly semiconductor index down by more than 11%. This was sparked by results from US datacentre builder and operator CoreWeave, whose shares fell by over 25%.

AI growth concerns helped drive a decent rally in government bonds. The US 10-year Treasury yield edged slightly lower to just above 5%. This was despite a higher-than-expected US core CPI inflation, which increased by 0.3% in September. This saw futures briefly price in a greater-than-50% chance of an interest rate hike by the Federal Reserve (Fed) in October. However, the AI sell off saw markets dial back expectations of an immediate rate hike by the Fed, with futures pricing in only a 17% chance of an increase by the end of the last week.

In the UK, the economy grew by 0.1% in August which was little better than expected albeit lower than the growth seen in July.  The all-important services sector flatlined over the month which is a similar trend to that of recent years ahead of the Budget.

In Europe, the closely watched spread between German and French bonds (OAT-Bond spread) came down slightly alongside a wider decline in government bond yields across the continent. However, the rioting across France over the weekend and some other parts of Europe does not bode well. It increasingly appears that Marine Le Pen and the National Rally party could be well positioned for next year’s presidential election, raising questions about the future direction of France’s relationship with the EU. More broadly, the challenge of balancing fiscal discipline with public opposition to austerity measures remains a key issue for France and, increasingly, for other highly indebted governments seeking to bring public spending under control.          

Finally, the central bank of the Netherlands recently confirmed it had moved tonnes of the country’s gold out of the USA and to the Bank of England. London is seen as the best choice due to its position as a major trading centre and if you want to buy or sell gold fast in a crisis, London is the place to be, which makes the Bank of England a popular storage location. The Bank is one of the largest custodians of gold in the world and is thought to be sitting on 400,000 gold bars worth £200bn. If only all that gold belonged to the UK!

The post A new ‘Bre-ginning’ first appeared on Alpha Portfolio Management.

The UK has another new PM and one who faces the same challenges. One of these is energy security and the UK’s shift to greater electrification driven primarily by AI datacentres and EVs, while endeavouring to hit net zero emission targets.

While the UK is developing nuclear, wind and solar renewable energy, it is still reliant upon natural gas. In 2025, natural gas accounted for 35% of total UK energy demand. The UK’s gas supply is currently a mix of domestic production, Norwegian imports via undersea pipelines and LNG (Liquefied Natural Gas) from the US and Qatar. In 2024, the US supplied around 10% of the UK’s LNG requirements, but Wood Mackenzie suggests that this could rise to 60% by 2035. Meanwhile, the UK’s domestic gas production has been steadily declining for decades, with output from the North Sea at its lowest level since the early 1970s and is estimated to cover less than 50% of what we currently consume.

How does the UK make up the energy shortfall?

Events in the Middle East, with the closure of the Strait of Hormuz and disruption in the Red Sea, have seen energy prices soar, exacerbating the UK’s cost-of-living crisis. Both oil and gas prices have soared as supplies have been disrupted. Oil prices remain elevated but Saudi Arabia is increasingly demonstrating that damaged infrastructure does not automatically mean lost oil exports. The physical system is proving more reliant than feared however, adaptation is reducing scarcity rather than restoring normality.

The same cannot be said of LNG, where supply is proving considerably harder than oil adaptation. European gas prices have more than doubled to above €80/MWh. A greater concern is Eurozone storage, which is currently standing around 70% ahead of winter, while Qatari LNG exports remain constrained. Unlike crude oil, LNG cannot be easily re-routed through pipelines, alternative ports or logistical workarounds. While the oil market may be beginning to reflect some supply adaptation, LNG markets may be pricing in the greater scarcity.

To compound domestic issues, Britain’s gas storage is currently at a decade-long low due to the events in the Gulf, just 12 days’ supply. So, let’s hope the mild weather continues for as long as possible!

Given these challenges, reducing the UK’s dependence upon LNG imports should be a priority. The approval of the Rosebank and Jackdaw oil and gas fields in the North Sea rests with new PM Andy Burnham and is proving to be a political hot potato. It remains to be seen whether that hot potato is baked on American LNG, renewables or North Sea gas!

What have we been watching?

Oil prices remain elevated, but US equities edged up last week and the S&P 500 and NASDAQ indices hit another record high, supported by expectations of strong earnings this week. Increasingly, the AI trade is being seen as a hedge against higher interest rates, which have a greater impact on the wider economy and market.

In Europe the closely watched yield spread between German and French government bonds (OAT-Bund spread) narrowed ever so slightly, easing some concerns, although fiscal and political uncertainty remains.

Markets continue to navigate the complex geopolitical events in the Middle East and Ukraine/Russia. Last week, Brent oil climbed over 2% to just under $105. This morning Brent oil has eased slightly to $104 on Trump’s claims over the weekend of an ‘energy ceasefire’ between Russia and Ukraine. However, reports of a Russian attack on a Ukrainian power plant have cast doubt on the prospect of an agreement. Trump also announced that Putin had agreed to release 300,000 tonnes of diesel immediately to the US and global marketplace, to be followed by a further 500,000 tonnes in November and 1 million more after that. President Zelensky called the deal a gift to Putin that amounts to ‘an investment in a war that must be ended.’ Reports suggest that the US had threatened to withdraw vital intelligence support to Ukraine if it continued to attack Russian refineries.

Meanwhile, there is the risk of wider regional escalation in the Middle East. A day after 13 people were killed and hundreds injured in a Houthi missile attack on the international airport in the Saudi Arabian capital, Riyadh, a second strike has killed another person. Saudi Arabia has intensified air strikes in Yemen, while Trump has said that the US ‘may’ join strikes against the Houthis after an American was among those killed on Saturday. The escalation comes as Saudi-backed Yemeni government forces counter recent Houthi gains near Bab el-Mandeb, the crucial Red Sea shipping chokepoint. Attacks on Riyadh and fighting around Bab el-Mandeb suggest oil and gas prices are likely to remain elevated, together with shipping costs while there is still continuing disruption to shipping in the Strait of Hormuz.

Iran has denied directing the Houthis and its foreign minister has urged diplomacy with Saudi Arabia, but there is little sign yet of de-escalation. Meanwhile, Trump has said that the US is ‘having productive discussions’ with Iran and that ‘we will not be attacking Iran at any time prior to the midterm election.’ Iran’s foreign minister said that Iran was reviewing a US proposal and would respond in the next few days.

In the UK, the IFS warned of a potential £35bn gap in the public finances by 2029-30 if spending rises in line with inflation and the government proceeds with its target of increasing defence spending to 3% of GDP. The IFS also cautioned that a ‘do-nothing’ budget is not an option, although that appears to be the government’s current approach. Meanwhile, at one point last week, the 10-year UK gilt yield hit a post-2007 high of 5.48% before the OAT-Bund yield narrowed slightly.

European Central Bank (ECB) head, Christine Lagarde was reported to have told Eurozone finance ministers that the ECB has instruments to deal with unwarranted and disorderly market dynamics. This is the first sign of soft verbal intervention in the current European government bond crisis and will no doubt have prompted the market to access what is in the ECB’s toolkit. The slight recovery in French bond yields supported a relief rally across much of Europe, as it eased fears about contagion spreading to other countries. However, fiscal and political concerns remain.

Finally, how the recent volatility in global bond markets has fed through into the UK housing market. The average interest rate on a new five-year fixed mortgage deal recently hit 6% for the first time in three years. Unfortunately, events outside the UK, such as the conflict in the Gulf, are exacerbating the ‘cost-of-living’ crisis.

The post An energy crisis of our own making? first appeared on Alpha Portfolio Management.

Xi Jinping received a red carpet welcome from Trump at their recent summit. This will have helped cement his image at home as Trump’s equal. In return, China has resumed its panda diplomacy by gifting two giant pandas – Ping Ping and Fu Shuang – to Atlanta’s zoo.

However, despite Trump rolling out the red carpet for him, Xi Jinping didn’t get everything he wanted. The trade truce has been extended, but only by two months until 10^th January. This suggests that the US wants China to do more to fulfil its side of the bargain before pandering to China’s commercial and political ambitions. The large can, containing Trump tariffs, China’s dominance of rare earth minerals and access to advanced US AI chips, has been kicked down the road.

The two superpowers also remain at loggerheads over Taiwan. Xi Jinping once again made it clear that US arms sales to Taiwan are a red line for China. Trump had previously delayed a $14bn defence package for Taiwan but is coming under bipartisan pressure to continue US support for Taiwan.

Whilst AI and hardware manufacturing are booming, thanks to vast state-funded investment, the uncomfortable truth for Xi Jinping is that the domestic manufacturing economy is in trouble and AI creates relatively few jobs.

A heavily undervalued currency and many open or hidden subsidies are helping buy global market share, such as in EVs. Export markets are helping prop up growth. China’s high-tech factories are churning out cheap EVs, assembled by robots. However, outside the factory gates stands a young university graduate who cannot find a job. Youth unemployment remains stubbornly high and that university graduate is unlikely to have a baby. China’s birth rate has fallen to just one child per woman, a slow-motion demographic disaster. Meanwhile, property prices have slumped, which has further undermined consumer confidence. Domestic new car sales have fallen by 20% from a year ago. This is unhelpful for much of China’s manufacturing sector, which is suffering from overcapacity.

Is the US in better shape?  Trump also has his problems with the midterm elections looming and Iran not altering its stance over the Strait of Hormuz. The US long-term issues are mostly on a lesser scale than China, but the country suffers from its own imbalances, and what about that massive investment in AI? However, as a market economy with a deep and open capital market, solid institutions and the rule of law, the much richer US maintains many advantages over China.

Perhaps Trump and Xi Jinping should be focusing on consumers at home, instead of grandstanding with pandas or on a red carpet?

What have we been watching?     

A global government bond sell-off, European bond contagion on fears of stagflation and that some developed country governments are spending beyond their means. The situation was not helped by Trump, who had threatened to block US diesel exports. This fear eased slightly following the news that oil and diesel would be released from the G7 strategic reserve. Markets had been concerned that central banks would need to hike interest rates in October, but the European bond contagion and softer US jobs data appear to have removed some of the immediate pressure. US equities were relatively steady last week, but European equities, which are dominated by banks and financials, were impacted by the volatility in bond markets.

Brent oil rose by almost 5% last week as Houthi attacks on Saudi Arabian energy infrastructure continued, as have Iranian attacks on oil tankers in the Strait of Hormuz. Trump also threatened to block exports of US diesel, as he has come under pressure to help US consumers ahead of the midterm elections. However, there was some relief for refined products, as at the end of last week the G7 countries announced a plan to release 100 million barrels of oil and diesel from the strategic reserve. This morning Brent oil has eased slightly below $102.

The European bond contagion was triggered by concerns that some developed country governments are spending beyond their means. France is a particular concern, as government debt is 119% of GDP, the economy is not growing, and the deficit is 5.4% compared with an EU limit of 3%. This saw the spread between German and French 10-year government bonds widen to the greatest point since records began following German reunification in 1990! Other heavily indebted European countries saw the spread on their bonds widen against Germany, with Italy seeing it increase to a similar level as April 2020 during the initial wave of the Covid-19 pandemic. The UK was not immune from the turmoil in bond markets and at one point the yield on 30-year government debt climbed above 6%.     

In the UK, new PM Andy Burnham gave a keynote speech at the Labour Party’s annual conference. He outlined such ambitions as a reform of social care, an increase in EU integration, an expansion of social housing and changing the voting system. He intends to stick to the Labour manifesto for now and cannot fully deliver on these ambitions until 2030, the next scheduled election. The idea appears to be to sell these policies to the public and then ask for a mandate. Burnham has pushed back against calls for an early election, saying the public want him to get on with the job, but the current manifesto stands in his way. Might we see an earlier UK general election in 2027 if Labour moves into a clear lead in the polls?

In Europe, the ‘flash’ CPI inflation came in ahead of expectations at 3.8%, putting more pressure on the ECB. However, higher French bond yields are already tightening financial conditions and should make it progressively harder for the ECB to deliver the interest rate hikes the market has been expecting. The French economy and ECB interest rate cycle appear inextricably linked at the moment. The chances of an ECB rate hike in October have fallen from 42% at the start of last week to 14%.   

In the US, the jobs report for September was softer than expected, which led investors to dial back on expectations for an interest rate hike by the Federal Reserve (Fed) in October. The chances of this have fallen from 64% at the start of last week to 23% according to futures markets. Nonetheless, the US was not immune from the global bond sell-off, with the US 10-year Treasury yield hitting 5.27%. Besides government spending and debt issuance, US fixed interest investors also have had to take account of AI capital spending and associated bond issuance by US tech companies.

Finally, the RAC recently highlighted that the price of diesel had entered ‘uncharted territory’ after the average UK price rose to over 200p per litre. This is due to the closure of the Strait of Hormuz and is higher than the previous record in June 2022, following Russia’s invasion of Ukraine. Trump had also threatened to block US diesel exports last week. The UK is heavily reliant on diesel imports as the fuel is used in the independent trade, haulage and agricultural sectors. G7 countries are to release oil and diesel from the strategic reserve, which may help dampen prices in the short term. However, the UK cost-of-living crisis is not ending anytime soon unless Trump can reopen the Strait of Hormuz.

The post China’s Panda diplomacy first appeared on Alpha Portfolio Management.

OpenAI, the owner of artificial intelligence (AI) ‘chatbot’ ChatGPT recently entered into talks for a major new round of funding, which is critical to a network of financial arrangements and hardware deals it has built up as it seeks to secure computing power. Technology heavyweights from Nvidia to Oracle rely on contracts with OpenAI for their future revenues. To support growth, OpenAI needs to invest in data centres and computing power to train and run its AI models.

OpenAI is reported to be seeking a valuation of $1.2 trillion, up from $850 billion in March 2026. To support this valuation, it has been forecast in presentations to investors that revenue could grow from $36 billion this year to $840 billion by 2030. However, this will require massive up-front investment and as a result, OpenAI expects negative free cash flow of $278bn over the next five years.

OpenAI is not alone in its ambitious growth and spending plans, and more AI giants are seeking fresh ways to fund growth.

This has led to the growth of residual value guarantee funding by banks, under which the AI giants guarantee a minimum future value for chips or data centres. Bankers describe the guarantees as ‘balance sheet efficient’ or hidden off-balance sheet exposure. This is because the debt is issued by special purpose vehicles that own the infrastructure, rather than the AI companies themselves. This allows them to lend their financial muscle to deals without needing to fully book the liabilities. However, they have to cover specified shortfalls if these AI assets have to be sold one day or fetch less than a guaranteed minimum value.

There has been a significant expansion in off-balance sheet exposure over the past year and $300bn is thought to have been raised by AI companies via residual guarantee funding. Some analysts estimate that off-balance-sheet commitments and credit support by major AI hyper-scalers and chip makers is now in excess of $3 trillion. This has added a very high degree of complexity to the credit risk profiles of these AI businesses. Credit rating agencies and bond investors are warning that this structure could result in substantial losses if AI hardware values were to decline.

AI companies are currently involved in a global race for supremacy. OpenAI has already reduced its prices as it seeks to take market share from US rival Anthropic and has reacted to the threat of cheaper ‘open weight’ AI models from China.

Only time will tell if the use of residual guarantee funding was a wise decision.

What have we been watching?

US government bond yields are hitting their highest level since 2007 on expectations of higher inflation and interest rates. However, US equities were supported by positive economic data, leaving the S&P 500 index within 1% of its record high. Hopes were also raised by the prospect of US-Iran talks, but this enthusiasm has been dented over the weekend.

Last week saw the summit between Presidents Trump and Xi Jinping. The main news from a market standpoint was that the trade truce is to be extended by a further two months, which will now keep tariffs at a lower level until 10^th January. This is shorter than had been signalled by US officials beforehand but does offer more time to potentially reach a longer deal. The two leaders also discussed AI, although it’s unclear whether they agreed to any safeguards.

Iran reiterated that it would not soften the conditions for reopening the Strait of Hormuz. Iran’s foreign minister insisted that it would not back down from demands including sanctions relief, access to its frozen assets and an end to US blockade measures. President Trump rejected Iran’s latest proposal as inadequate but said he expected negotiations to continue. Lines of communication remain open, but that is the only positive, otherwise the US and Iran appear to be in stalemate. This morning, Brent oil has climbed over 2% to almost $107. Iran appears to be holding out in the hope that by prolonging the uncertainty, it can damage Trump in the US mid-term elections on November 3^rd.  The US administration is reported to be considering a diesel export ban to lower domestic fuel prices ahead of the midterm elections.

The AI debate continues to impact global equity markets. Over the weekend, OpenAI announced that it was pausing development of certain advanced AI models after agents have been reported to have gone rogue across a number of recent incidents. OpenAI acknowledged that it alerted ‘dozens’ of global institutions after their websites had been meddled with by its AI bots acting improperly. This disclosure comes days after Australia’s PM announced that OpenAI agents had breached non-public files on the website of its government-run health scheme.

The UK ‘flash’ PMI business activity indicator dropped to 51.7 from 52.5 last month, with the manufacturing expanding slightly but the service sector contracting ahead of the budget on 28^th October. Energy costs, higher borrowing costs and continuing geopolitical uncertainty were cited as adversely impacting company confidence. Meanwhile, government borrowing in August was higher than expected at £18.3 billion taking the year-to-date deficit up to £77.3bn compared with the OBR forecast of £69.3bn!

The Eurozone ‘flash’ PMI business activity indicator climbed to a 3 year high of 53.1. However, higher inflation and interest rate worries saw the German 10-year Bund yield rise to a post-2009 high of 3.6%.

The US ‘flash’ PMI business activity indicator hit a 5-year high of 58.4. Following this data release, the chances of a US interest rate hike by the Federal Reserve in October have climbed from 53% to 64%, according to futures traders. Reflecting these developments and events in the Gulf region, the US 10-year Treasury yield climbed to 5.16%, the highest level since 2007. Meanwhile, the 30-year US Treasury yield almost hit 5.5%, the highest level since 2004. This is having an impact on the US housing market, with the US 30-year mortgage rate now above 7%.

The Japanese 10-year bond yield hits its highest level since 1996 moving above 3%.

Finally, Nvidia Chief Executive Jensen Huang has described warnings that AI could lead to humanity’s extinction by the next decade as ‘doomsday narratives.’ He said ‘2030 is not going to be the end of the world.’ Given the amount of money AI hyper-scalers and chip makers are currently spending, let’s hope not, as what a waste of money that would prove to be!

The post AI – complex credit risk first appeared on Alpha Portfolio Management.

BRICS is an international organisation, currently comprising eleven countries: Brazil, China, Egypt, Ethiopia, India, Indonesia, Iran, Russia, Saudi Arabia, South Africa and the United Arab Emirates.

The founding members were Brazil, Russia, India and China, hence the original acronym BRIC. The inclusion of the latter two countries means that BRICS comprises more than a quarter of the global economy and nearly half the world’s population. As such, it has grown in stature and has become a major political power.

Russian inspired in 2009, but these days it is driven by China. BRICS was formed to counter the influence of Western powers and has sought to reshape the world order, reduce US influence and establish its leadership in technology, such as AI. It has also sought to reduce the dominance of the US dollar, by promoting greater trade settlement in national currencies.

The leaders of the BRICS nations recently met at their latest summit in New Delhi and, not surprisingly, were united in their opposition to ‘Trumpism’. This reflects their growing frustration with Trump’s protectionist policies from tariffs to sanctions. The summit provided an important opportunity for China’s President Xi Jinping to discuss issues such as the Gulf war ahead of his meeting with Trump later this week.

Is the latest BRICS summit likely to be a game changer?

No, but the image of XI, Modi and Putin smiling broadly and holding hands at the summit contrasts with political disarray in the West. Trump has made America more isolationist and he has questioned the NATO alliance. Trump has also riled key allies such as Canada, the UK and Europe. Meanwhile, within Europe, many governments are preoccupied with domestic problems such as immigration, the rise of populist parties and high levels of debt. Putin also remains a threat to Europe and his close ties to Xi Jinping are a concern.

What have we been watching?   

The football season is well underway and last week it was a story of two halves for global equities. The first half saw a fresh spike in energy prices, renewed stagflation fears and the US 10-year Treasury yield closing above 5% for the first time since 2007. The second half saw the US Federal Reserve (Fed) deliver the first interest rate hike since 2023, which, together with some easing in energy prices, reversed the spike in global bond yields. This left risk assets broadly unchanged over the course of the week. Markets were also supported by optimism from US-China trade talks, ahead of the much-anticipated meeting between Trump and Xi Jinping later this week.

Brent oil surged to $109 earlier in the week as Houthi attacks on Saudi Arabian energy infrastructure intensified. However, Saudi Arabia said that the damaged East-West pipeline was expected to be back at half capacity within days and in full within six weeks. As we write this morning, Brent oil is 2% lower to just under $102.      

Over the weekend, Trump announced that the US, Denmark and Greenland had reached an agreement that would allow a significant expansion of the US military presence on the island, with Trump describing the deal as giving the US ‘permanent control over security’ in Greenland. The deal recognises Greenland’s right to self-determination and Danish sovereignty. It falls well short of Trump’s earlier ambitions to acquire Greenland, but if the agreement holds, it removes a political hot potato for the US and NATO.

In the UK, the Bank of England (BoE) left interest rates on hold at 3.75% but said that policy ‘may need to tighten’ amid rising inflation forecasts. This appears to be preparing the ground for a 0.25% hike on the 5^th of November, unless energy prices drop.  Separately, and more significantly, the BoE announced it is pausing all government bond sales for six months. It has a new strategy regarding QT (Quantitative Tightening), which, allowing for the value of gilts to mature over the next year, will see the BoE reduce its gilt holdings by an average of £46bn a year until 2034, when it will have fully reversed QE (Quantitative Easing). This news, together with global bond yields receding slightly from their peak, saw the cost of UK government borrowing ease very slightly.

There were heavy defeats for the ruling CDU government in two German state elections with a surge in support for the far-right AfD in one and far-left Die Linke in the other. Chancellor Friedrich Merz called the results a ‘disaster’. The shock was that the CDU government didn’t even make the 5% threshold to enter parliament for the first time in the country’s post-World War II history. This will create huge amounts of pressure on the German Chancellor and raise questions about the reform agenda.

The Federal Reserve (Fed) delivered its first interest rate hike since 2023, whilst also signalling that it had started a modest tightening cycle. The Fed increased interest rates by 0.25% to 3.75%-4%, as expected, with the unanimous decision accompanied by a more-than- expected ‘hawkish’ shift in the Fed’s future interest rate ‘dot plot’ guidance. Comments by new Fed Chair Kevin Warsh described the hike as removing ‘a dose of accommodation’, whereas previously committee members had viewed policy stance as ‘mildly restrictive’.  This left a clear sense that the Fed is at the start of a moderate tightening cycle rather than delivering a one-off hike. Markets therefore moved to fully price in another three possible rate hikes from the Fed by next summer.      

The Japanese yen weakened 2% against the US Dollar last week. This followed a 0.25% interest rate hike by the Bank of Japan. However, this had been expected and the fact that two members of the committee voted against the hike was interpreted by markets in a ‘dovish’ light.

Finally, Brexit rumbles on! A summit between the UK and the EU has been delayed again as the two sides clash over Brussels’ new ‘Made in Europe’ policies. A meeting to reset post Brexit relations at the end of July was postponed and has now been further delayed until the end of November. Meanwhile, the UK has pushed back against EU demands for a ‘Farage clause’ requiring any future government that walked away from the reset deal to pay financial compensation to Brussels. Some EU diplomats are suggesting it may even pay the EU to delay any summit until after the next British election, which may not be until 2029!

The post Just another BRIC in the wall first appeared on Alpha Portfolio Management.

President Trump’s envoys Steve Witkoff and Jared Kushner recently held talks with both Putin and President Zelensky, hoping to resume trilateral negotiations between Russia, Ukraine and the US, which stalled following the Gulf conflict. A central issue is the remaining Ukrainian-held territory in the Donbas. Putin has repeatedly insisted that any peace agreement would need to recognise the realities on the ground and that he is opposed to a ceasefire as a prelude to peace talks. In the latest discussions, there was general acknowledgment that the war was unlikely to end before the winter.   

In the meantime, Putin appears to have become emboldened, judging by the increasing hybrid warfare he is undertaking against NATO in Europe. Last month, the authorities foiled an attack on Leipzig/Halle airport, using a drone laden with military-grade explosives. This should be a wake-up call and it has exposed NATO’s failings to deter Russia from staging attacks below the threshold that triggers the alliance’s Article 5 mutual defence clause.

Russian proxies and intelligence agencies have been undertaking hybrid warfare against Europe for some time now, sowing disinformation, launching cyberattacks, fire-bombing warehouses, targeting politicians’ homes and cars and damaging undersea fibre optic cables. European intelligence agencies are bracing themselves for an increase in Russia’s reckless activity to coincide with a run of key European elections next year, including in France, Italy and Poland.

NATO’s Article 5 has a ‘fuzzy boundary’ which Russia keeps on exploiting. Complicating NATO’s position is the perceived shift in US policy towards Russia, with Trump playing down the threat from Putin.

The UK is also squarely in Putin’s crosshairs for its robust support of Ukraine, including missile technology. Over the weekend, a Russian drone hit a train near the Ukraine-Poland border, shortly after former PM Boris Johnson and top European security officials had passed through. A coincidence or the latest reckless act by Putin?

Be prepared for more hybrid warfare by Putin, whether it be more cyberattacks or attempts to damage our undersea energy and communications.

What have we been watching?

A huge sell-off in government bonds, which pushed yields up to multi-year highs around the world as global stagflation fears resurfaced. This was driven by a fresh surge in energy prices as the situation in the Gulf deteriorated. Markets are concerned that central banks may need to hike interest rates more aggressively.

Meanwhile, over the weekend there was a rare show of agreement amongst several of the most important AI leaders who are concerned that AI development is now moving so quickly that safety, oversight and our ability to fully understand the systems need more time to catch up. For investors, the key question is whether this is the first sign that the extraordinary AI investment cycle might eventually moderate. This seems unlikely, as it is hard to see China slowing its AI development activity, which is something President Trump said over the weekend, who didn’t seem to favour any kind of pause.

Brent crude oil rose by almost 9% last week to just over $104 while European natural gas prices jumped by over 10%. This morning, Brent oil has climbed a further 3% to $107. The increase followed further attacks on tankers in the Gulf and the precautionary closure of a major Saudi Arabian oil pipeline by drones that had been fired from Iraq. The pipeline has been exporting between 4 to 5 million barrels of oil a day and has been Saudi’s primary workaround since Iran closed the Strait of Hormuz. The key issue now is how quickly the pipeline can be restored. To add to Saudi Arabian and market woes, the Houthi rebels have captured Perim Island, threatening its Red Sea oil exports. About 12% of global trade passes through the Red Sea, so its closure, alongside that of the Strait of Hormuz, is a major concern. Crown Prince Mohammed Bin Salman has reportedly requested direct US military assistance against the Houthis, though Trump has apparently declined direct strikes against the Houthis. Trump has said that he does not think the Iran war will end until after November’s mid-term elections, adding that oil prices will not come down until then.

Last week, the European Central Bank increased interest rates by 0.25%, commenting that ‘inflation is expected to remain well above target for an extended period.’ Looking to the week ahead, it is a bumper week for central bank interest rate decision making. The Bank of England is expected to keep rates on hold at 3.75% while the Bank of Japan is expected to announce a 0.25% hike with the decision driven by currency stability considerations as well as inflation.

In the US, futures suggest an 87% probability that the Federal Reserve (Fed) will hike interest rates by 0.25%.  Focus will fall upon new Fed Chair Kevin Warsh’s press conference and how he deals with his dislike of forward guidance on interest rate policy but the need to calm markets which are calling for greater forward visibility.

Finally, a modern-day Poldark? The UK’s National Wealth Fund has invested £71m in the Tungsten West mine in Cornwall. It is one of the world’s largest tungsten resources, which is critical in defence, aerospace, next-generation energy and electronics. The company is targeting a ramp-up of full-scale production in Q1 2027. Government backing for the development of key rare earth and metals projects is vital.

The post Putin’s hybrid war against Europe first appeared on Alpha Portfolio Management.

The track record of successive UK governments when it comes to delivering massive infrastructure projects on time and within budget is not great, with HS2 being a prime example. HS2 is even more disappointing in that it looks as if it will fail to deliver anywhere near the original ambitions to connect the North of England with London.

New PM Andy Burnham is seeking to redress the North-South imbalance by devolving more power to the regions, with some reports of up to 90,000 jobs eventually moving from London to the North. However, could the Thames Barrier throw a spanner in the works given government finances?

The Thames Barrier, which protects London from flooding, may need to be replaced up to two decades earlier than planned and could cost in excess of £20bn!

When it was built in the 1980s, it was expected to last until 2030, but subsequently, it has been hoped that it might offer protection until 2070. However, due to climate change and rising sea levels, government officials now believe it may need to be replaced between 2050 and 2060. An increase in extreme weather has caused degradation to the infrastructure and prevented maintenance from being carried out.

It is thought that including planning, it could take up to 30 years to build a replacement Thames Barrier. Options for a replacement include building a new barrier with locks on the existing site at Woolwich Reach in east London to improve resilience or building a new barrier further downstream. These could also be supported by the creation of flood storage areas such as reservoirs and marshlands to store excess water.

London’s importance as a global financial centre cannot be ignored, neither can over £300bn of residential property or key infrastructure such as the London Underground, not forgetting the many sites of historical importance.  Somebody is going to have to take a decision about the Thames Barrier in the not-too-distant future and it’s going to be a key one given the current North-South political and economic debate.

What have we been watching?             

Government bond yields and the conflict in the Gulf continue to overshadow markets.

Over the weekend, there was a tit-for-tat escalation targeting commercial shipping around the Gulf. There were reports of several tanker incidents and maritime attacks which have, once again, heightened concerns about the security of energy supplies moving through the Strait of Hormuz. Both the US and Iran have accused each other of responsibility for the attacks! Brent oil, which increased by over 7% last week, has continued to climb this morning and has hit $97. Meanwhile, European natural gas futures recorded the fourth successive weekly gain, rising by over 7%.

Rising energy prices are leading investors to price in a growing probability of a greater inflationary shock, particularly in Europe, which, unlike the US, is not a major oil and gas producer. This has pushed government bond yields to multi-year highs around the world. For example, at one point last week, the German 10-year bond yield climbed to a post-2011 high of 3.37%, while the US 10-year Treasury yield briefly hit 4.78%. The UK was not immune from this trend, with the UK 10-year gilt yield hitting 5.29% before edging back slightly to 5.16%.

In the UK, the new Chancellor John Healey is set to give his view of the UK economy ahead of his budget on the 28^th of October. It comes as Jaguar Land Rover announced 4,000 voluntary redundancies over the weekend. This should not come as a surprise, as we highlighted in last week’s Alpha Bites, Europe’s car industry is facing numerous challenges, particularly from Chinese imports. The new Chancellor’s tasks will be made more challenging by the rise in global bond yields.

In Europe, the main headline over the weekend is Germany’s political landscape shifting further to the right, after the AfD secured around 44% of the vote in the Saxony-Anhalt state election. It is the AfD’s strongest result in any German election to date and more than double its support from 2021. Chancellor Friedrich Merz’s CDU party slumped to 17% of the vote as voters expressed growing frustration over economic stagnation, energy costs and migration policy. The regional election result underlines how anti-establishment and populist parties continue to gain traction across Europe.       

In the US, last week saw a very strong jobs report with payrolls up by over 162,000 in August, while there were upward revisions to the previous two months’ figures. This has increased the likelihood that the Federal Reserve (Fed) will increase US interest rates at its next meeting in September. Futures are currently pricing in a 62% chance of a Fed hike.

Finally, a topical example of inflation! The Thames Barrier took eight years to build and on completion in 1982, cost £535m. Any idea what that is in today’s money? Well, it’s £2.6bn! So even adjusting for inflation, the cost of the new Thames Barrier could be ten times that of the original.

The post The Thames Barrier to the North-South divide first appeared on Alpha Portfolio Management.

Germany’s export-orientated economy is now in its seventh year of economic stagnation. This is due to a combination of COVID, high energy costs due to the war in Ukraine, US tariffs and Chinese competition in key industrial markets.

The answer to these challenges by the German government is a €500bn stimulus programme – the Special Fund for Infrastructure and Climate Neutrality – to boost the economy over a 12-year period. The programme is designed to bypass the country’s constitutional “debt brake” or Schuldenbremse.

The German car industry has been the backbone of Europe’s largest economy and is facing significant headwinds. The automotive sector is one of the largest employers in the country and has been significantly impacted by Chinese competition. Following rapid growth, Chinese car brands now account for more than 10% of vehicles sold across Europe.

As a result, Germany’s carmakers are embarking upon their most extensive restructuring ever to combat the scale of the growing pressure from Chinese EV imports. BMW is to incur €1bn in restructuring costs, which could see up to 10,000 job losses and car production cut by 15%. Volkswagen is reported to be considering as many as 100,000 job losses from its 625,000 workforce over the coming years. The knock-on effect to the employees  in the supply chains of these car manufacturers is still unclear.

The uncomfortable truth is that the shift from combustion engine to EV has levelled the playing field. For over a century, Germany’s mastery of the fiendishly complicated combustion engine was its moat. The shift to electric vehicles removed that moat, swapping that engine for a battery, some software and a much simpler drivetrain, resetting the game on terrain where China could compete.

On this new terrain the Chinese haven’t just caught up, they’ve lapped the competition. It’s estimated that a European manufacturer takes 40 to 80 months to bring a new model to market, where Chinese firms manage it in under 24 and the global consultancy McKinsey pegs China’s EV cost advantage at 20-50%, or north of €6,000 on a €30,000 car. Volkswagen’s once-in-90-years redundancy programme, by contrast, aims to save roughly €1,000 per vehicle — which is like fighting a house fire with a well-aimed water pistol…

Pressure on German car manufacturers has been building as they struggle to sell in China and face US tariffs. Chinese cars are gaining market share in Europe at a much faster pace than expected. The restructuring programme underway risks permanently shrinking one of the most important industries in Europe’s largest economy. One hope must be that German automotive workers made redundant can be re-employed in the defence sector, where Germany is ramping up investment given the threat from Putin.

What have we been watching?

Long-term US government bond yields kept climbing last week, then the Treasury caught investors off guard by saying it would at least double its buyback operations for longer-dated Treasuries as US debt reached a monumental $40 trillion — pushing debt-to-GDP to its highest since WW2!

The aim is to prop up demand at the long end and stop yields spiralling higher — borrowing costs that feed through to mortgages, business loans and the government’s own interest bill. It’s a small amount relative to the total stock of Treasuries, but the signal was enough to flatten the curve and pull the 30-year yield down from its post-2007 high of 5.31% on Monday. The relief didn’t last though, as the yield drifted back up to close just shy of its earlier peak.

With no sign of US-Iran talks over the week, Brent crude climbed +6.6% to c.$94/bbl, which reignited inflation fears.

This, in part, contributed to a risk-off tone across the markets, with equities down across the board: S&P 500 -1.43%, STOXX 600 -0.56%, and the Nikkei -3.93%.

Gold hit a 3 month high of c.$4,600, supported by previously described US bond intervention and reignited inflation fears.

US–Canada trade talks collapsed over the weekend. PM Mark Carney said Canada was “walking away from a bad deal” and would match Washington’s tariffs dollar for dollar — 50% tariffs on around $20bn of goods, with retaliation starting September 8. Trump hit back online, and the Canadian dollar fell against every G10 currency this morning.

Unemployment was expected to fall, it remained at 4.9%, while CPI inflation came in higher at 2.9%, as expected. PMIs were healthy and a notch better than analysts had expected.

One bright spot was better than expected flash manufacturing PMI, which came in at 52.8.

Finally, another challenge for new PM Andy Burnham. Against a background of UK drought and wildfires, a decision is looming over the future of the Rosebank oil field and Jackdaw gas projects in the North Sea. Supporters argue that domestic production is better than imports for meeting domestic demand, as it means fewer emissions from shipping gas, better regulation, and taxes and jobs for Britain. Will the war in the Gulf shift government thinking?

The post Is all well in Germany? first appeared on Alpha Portfolio Management.

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.