Lightning Strike

F35 lightning multi-role jet are due to land in the UK. The next chapter in UK air defence. HMS Queen Elizabeth is soon not to be an aircraft carrier without planes

The spring Bank Holiday weekend saw thunderstorms and torrential rain sweeping across parts of Britain, with dramatic lightning flashes across the sky. Around 15,000 lightning strikes were recorded in the early hours of Saturday morning.

This week we expect more lightning. However, this is the long-awaited arrival of the first £100m new ‘game changer’ F-35 Lightning stealth jet in the UK. The jets will land in RAF Marham in Norfolk where they will join 617 Squadron – the wartime Dambusters. 207 Squadron will become the UK’s F-35 training unit from July 2019. Britain currently has 15 F-35Bs STOVL – the short take-off and vertical landing variant of the fighter jet, based in the US and has pledged to purchase 138 in total. The F35 Lightning takes part of its name from the iconic English Electric Lightning, the all-British Mach 2 fighter jet of the Cold War era. Dating back to its introduction in 1959, nearly 60 years on, it is still one of the fastest fighter planes ever built.

The UK is also getting closer and closer to ending the saga of our ‘aircraft carrier with no planes’. Merlin helicopters were the first aircraft to begin flying from HMS Queen Elizabeth and are expected to be followed by F-35 jets in Autumn this year. However, there are only 20 aircraft carriers that can carry and launch fixed-wing aircraft currently in service around the world. Despite their immense cost to build and operate, former US Defense Secretary William Cohen was fond of saying that without ‘flattops’ the US has ‘less of a voice, less of an influence.’ Once considered largely redundant, the US currently has a further 6 carriers under construction.

Given the deterioration in relations between Russia and the West over the shooting down of Malaysia Airlines Flight 17 in 2014 and the nerve agent attack in Salisbury this year, along with Russian spy plane forays into NATO airspace, the arrival of the F-35 Lightning looks timely.

What have we been watching?

The possible escalation of a global trade war after President Trump pushed ahead with a 25% tariff on steel and 10% tariff on aluminium imports from the EU, as well as Canada and Mexico. Canada has already responded by saying it would levy tariffs of up to 25% on $13bn of US goods from July 1st. The EU said it ‘will take immediate steps to retaliate’. Mexico is proposing tariffs on US farming and industrial products. President Trump seems to be doing a great job of upsetting his allies. The Canadian PM, interviewed on the BBC news was clearly not impressed.

In addition, the White House said it intends to move ahead with its plan to impose 25% tariffs on $50bn of imported Chinese goods by June 15th. The US would also restrict China from accessing sensitive US technology, with a list of controls to be announced by June 30th.  Trade talks between the USA and China do not appear to have gone well over the weekend. Chinese media warned ‘if the US introduces trade sanctions including raising tariffs, all the economic and trade achievements negotiated by the two parties will be void’.

There are no winners in a trade war and markets are still hopeful that common sense will prevail, but should this situation escalate then it would slow global economic growth. China would probably have to loosen fiscal policy and increase investment growth to offset the impact on its economy, storing up even more problems ‘down the road’.

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Despite the uncertainty of a global trade war, UK equities took some comfort from the resolution of the Italian political crisis but also benefited from Sterling which hovered around $1.335.

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Besides the threat of a trade war, political developments in Italy cast a shadow over the EU at the start of last week and led to a flight to safe havens within the fixed interest market. However, European markets were subsequently relieved as Italy managed to form a populist government. 

The Italian 10-year bond yield moved above 3% at one point during the political crisis and following comments from Italy’s central bank chief, who warned that Italy was on the cusp of losing investor’s hard-won trust. However, markets were relieved by the news that PM Giuseppe Conte had been sworn in as the new Italian PM while the respective Five-Star and League leaders will be deputy premiers. This avoids the risk of a second election that might have developed into a vote on Italy’s membership of the EU. Instead, Italy might revert to the slow burning problem of the new administration’s fiscal expansion plans and rolling back reforms, both a headache for the EU.

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We have said on previous occasions, while central bank QE programmes were necessary to help get some economies out of the financial crisis, they have nonetheless distorted investment markets. The Italian crisis saw the German 10-year Bund yield drop to under 0.4% last week to within a shade of its record low. However, German inflation was higher than expected in April at 2.2%. German Bund yields appear to be totally detached from economic fundamentals! In addition, what has the rise in Italian bond yields cost the European Central Bank which presumably, had been buying on lower yields as part of its QE programme?

Staying with European politics. Spanish PM Mariano Rajoy has been forced out of office by a no confidence vote in parliament. Socialist leader Pedro Sanchez who filed the motion after Mr Rajoy’s party was implicated in a corruption scandal, will become the new prime minister.

In Europe, the higher oil price has led to higher inflation. In May, inflation across 19 EU states that use the euro was 1.9%. The core inflation measure which excludes energy prices increased to 1.1%.  Meanwhile, the latest survey of eurozone manufacturing has added to evidence that economic growth is softening. The activity indicator, while still remaining comfortably in expansion territory, nonetheless dropped to a fifteen-month low.

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India pipped China at the post to claim the title of the world’s fastest growing economy in the opening months of 2018. While China’s economy grew by 6.7% in the first quarter of 2018, India’s economy expanded by an impressive 7.7%.

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Brent oil recovered to $77 on reports that OPEC plans to stick to its output cuts until the end of 2018, while further adjustments would be gradual.

Finally, an interesting point raised by the International Energy Agency (IEA). Where will governments get money from in the future if everyone buys an electric car? The IEA has calculated there could be a $92bn shortfall in global fuel tax revenue by 2030 if 30% of new car and truck sales are electric. Sounds like even more unrepaired potholes on the roads!

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