Alpha Portfolio Service Brochure
Our thoughts are with the families affected by the recent hurricanes.
When it comes to the causes of hurricanes such as Harvey and Irma, climate change is not a smoking gun. However, according to the Clausius-Clapeyron equation, a hotter atmosphere holds more moisture. For every degree in warming, the atmosphere can hold 7% more water. This tends to make rainfall events more extreme when they occur. The waters of the Gulf of Mexico are currently estimated to be about 1.5 degrees warmer than between 1980-2010 according to the Grantham Institute for Climate Change.
The wind strength of hurricanes is measured by the Saffir-Simpson scale (SSHWS) of between 1-5. Critics of the SSHWS claim it does not measure rainfall or storm surge, but just wind speeds. For example, Harvey was a category 4 hurricane but caused so much flooding damage in Texas, because of the sheer volume of rainfall, as it moved very slowly. Having wreaked havoc in the Caribbean, Hurricane Irma has been downgraded to 3 as it made landfall in Florida. The US has not been hit by a category 3 hurricane or higher since hurricane Wilma in 2005.
Whether you believe in global warming or not, the earth’s weather appears to becoming more extreme and brings with it the greater risk of more natural disasters. When this occurs in a major city such as Houston, Texas, the fourth largest populous in the USA, it can come with massive economic cost. Hurricane Harvey could cost as much as $300bn. Hurricane Irma could prove to be just as costly.
President Trump has yet to deliver his infrastructure plan but it looks as if rather than build a wall between the US and Mexico, perhaps he might want to think about improving the defences between the US coastline and the Gulf of Mexico?
What have we been watching?
Another week and the same old issues, North Korea, the US debt ceiling, Brexit and another hurricane, ‘Irma’.
Would you also believe it is ten years ago this week that building society, Northern Rock, collapsed heralding the start of the financial crisis in the UK?
Markets appear to remain sanguine despite the continued escalation of tensions on the Korean peninsula and given the lack of progress on Brexit talks. Global management teams also appear sanguine and M&A activity continues.
Following North Korea’s test of its biggest nuclear device, the UN Security Council held an emergency meeting at which the US ambassador accused Pyongyang of ‘begging for war’. Russian president Putin warned that ‘military hysteria’ could lead to a catastrophe and that the North Koreans would rather ‘eat grass’ than give up their nuclear weapons programme. China is still calling for dialogue and despite the US call for greater sanctions, continues to supply North Korea with oil. Could the Americans impose additional targeted sanctions on Chinese entities and individuals which are doing business with North Korea? In turn, could China respond against the US? In the meantime, Donald Trump has agreed for South Korea to buy ‘many millions of dollars’ worth of military equipment and weapons from the US’.
In the UK, a leaked Home Office plan to restrict the migration of lower skilled EU workers after Brexit was challenged by a number of business sectors. The British Hospitality Association described it as potentially ‘catastrophic’ while the National Farmers Union said it could cause ‘massive disruption to the entire food chain’.
Service sector activity grew at its slowest pace in almost a year in August. Meanwhile, car sales dropped for the fifth month in a row, as expected, although some buyers are no doubt holding off for the ’67 number plate this month. The British Chambers of Commerce (BCC) said there was ‘no sign on the horizon of a return to healthier levels of growth’ but did nudge its UK economic growth forecast for 2017 up from 1.5% to 1.6%. However, the BCC nudged down its 2018 and 2019 UK economic growth outlook to 1.2% and 1.4% respectively.
The Bank of England is likely to step up its warnings this week that households, businesses and investors are underestimating the pace at which UK interest rates will rise. Markets are currently assuming rates stay at 0.25% until the end of 2018 and will not rise above 0.5% until 2020.
In Europe, it appears Brexit is not the only challenge as the immigration crisis continues. The European Court of Justice has overruled Hungary and Slovakia’s objections to the compulsory fixed-quota immigration scheme which was introduced in 2015 to ease pressures on Greece and Italy. Hungary has not accepted a single asylum seeker since the scheme was introduced.
The head of Germany’s largest bank, Deutsche Bank said ‘The era of cheap money in Europe should come to an end, despite the strong euro. We are now seeing signs of bubbles more and more in parts of the capital market, where we wouldn’t have expected them’. He called on the ECB to plot a middle way that averts massive losses on the markets. The ECB said it will set out plans to end its €2trillion economic stimulus programme next month. European Central Bank (ECB) president Mario Draghi said ‘A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term’. The ECB has kept its 2017 inflation forecast at 1.7% but slightly trimmed 2018 to 1.2% and increased it economic growth forecast for 2017 for the eurozone to 2.2%, the fastest growth in ten years. However, the euro hit a 32-month high against the dollar which will act as a headwind.
In the USA, Donald Trump struck a deal with Republicans and Democrats that will fund the US government until mid-December and provide a short-term increase in the debt ceiling to provide Hurricane Harvey-related aid. The US Fed saw the early resignation of Vice-Chair Stanley Fischer who has tended to be more hawkish than dovish on interest rate policy. With question marks over Chair Janet Yellen when her term expires in February, this latest news raises more questions than answers for now. The interest rate futures market is currently suggesting a 65% chance of a US interest rate hike in December.
Chinese export growth slowed in August to 5.5% due to weaker global demand.
Brent oil picked up to $54 as it appears Hurricane Harvey has impacted US oil output harder than expected.
Finally, even if some MP’s don’t have much faith in Brexit, others out there must do. Norway’s sovereign wealth fund, one of the world’s biggest has shown confidence in the UK by raising its holding target for sterling bonds to 8% of its main fund. ‘Takk skal du ha’.
© Alpha Portfolio Management 2019. All Rights Reserved
Website by Lookhappy