Power cut

In Alpha Bites ‘Dragged through the dirt’ we highlighted Meta, which owns Facebook, Instagram and WhatsApp, planning to build the longest underwater communications cable in the world. We also highlighted the risk of sabotage to the world’s undersea infrastructure.

That was in March this year, so it is alarming to note that Microsoft’s Azure cloud services have recently been disrupted by damage to undersea cables in the Red Sea. There were reports that users of Azure – one of the world’s leading cloud computing platforms – in the United Arab Emirates and some countries in Asia had experienced increased latency due to the undersea fibre cuts.

While undersea fibre cables can be damaged by anchors dropped by ships, the latest incident in the Red Sea has once again raised fears of sabotage. In February 2024, several communication cables in the Red Sea were damaged, affecting internet traffic between Asia and Europe. The incident happened about a month after warnings that Iran-backed Houthi rebels might sabotage undersea cables and attack shipping in the Red Sea.

The latest cable cut adds to a growing list of such incidents over the last few years and is a stark reminder of how global communication systems are at risk of sabotage.

Closer to home, Russian spy vessels have been caught loitering over critical undersea infrastructure in the English Channel. The UK recently secured a £10bn deal to supply the Norwegian Navy with at least five new Type 26 frigates. The Royal Navy and Norwegian Navy will work together to hunt Russian submarines and protect critical undersea infrastructure. However, the sequencing of delivery of ships for Norway is still to be worked out, as new frigates are also under construction for the Royal Navy. Norway wants its first frigate by 2029. Two new frigates are due to enter service with the Royal Navy in 2028, with a further three currently under construction.

While the new frigates will improve security, they are still a few years away. In the meantime, the UK’s undersea infrastructure remains vulnerable. The UK remains Putin’s ‘public enemy number one’ for its support of Ukraine. Russia’s recent drone strike on Poland has revealed Putin’s contempt for NATO and Ukraine’s allies.

 

What have we been watching?

 

US equities hit another record high and US Treasuries rallied, as lower-than-expected wholesale inflation data raised hope of US interest rate cuts. The Federal Reserve (Fed) is expected to make its first interest rate cut this year, later this week. Meanwhile, AI companies received a boost from Oracle’s results with a positive outlook for its cloud services. Japanese equities also hit a record high as tech investment firm SoftBank jumped over 10% and hopes that the successor to Japan’s departing PM may adopt more expansionary fiscal and monetary policies.

However, geopolitical developments took a disturbing twist. Putin tested Europe and NATO’s resolve last week. Poland’s PM Donald Tusk said Polish airspace had been violated nineteen times by Russian drones, with some shot down. The UK is considering sending fighter jets to Poland. Trump said he would back more tariffs on China and India to pressure Russia, but only if the EU did the same. Meanwhile, Israel confirmed it had made a strategic strike on a Hamas target in Qatar. This is a particularly disturbing incident, as Qatar, a US ally, hasn’t been involved in the conflict in Gaza and has been acting as a negotiator between Israel and Hamas.

 

In the UK, the latest survey by the Royal Institute of Chartered Surveyors pointed to further downward pressure in the UK housing market ahead of the autumn selling season. Rental listings have also fallen at the fastest rate since the Covid-19 pandemic, suggesting landlords are leaving the market due to potential National Insurance and tax rises and the upcoming renters’ rights bill. There was more angst for Chancellor Rachel Reeves as the UK economy ground to a halt in July with zero growth in GDP in July due to a 1.3% contraction in the manufacturing sector. Sir Keir Starmer is also under growing pressure from some Labour MPs and trade union leaders in the wake of the Angela Rayner and Lord Peter Mandelson departures and has been told he has until next May to turn his government’s fortunes around.

 

In France, new PM Sebastien Lecornu began his tenure vowing to work with the opposition parties to resolve the country’s budget challenges. Meanwhile, the European Central Bank (ECB) kept its key deposit rate of interest on hold as expected at 2%. The ECB raised its economic growth forecast for the region for 2025 from 0.9% to 1.2% but trimmed that for 2026 slightly to 0.9%. Inflation is forecast to be 2.1% in 2025 before edging a little lower to 1.7%.

 

In the US, PPI data showed that wholesale producer prices fell by -0.1% in August, while the previous month’s data for July was revised slightly lower to +0.7%. This provided some reassurance to equity and bond markets, which have been concerned about the inflationary impact of Trump’s tariffs. The lower-than-expected wholesale inflation print would appear to give the Federal Reserve more scope to cut US interest rates in the months ahead. The case for more cuts was supported by the Bureau of Labor Statistics, which announced some sizable negative revisions to historic payroll data. Meanwhile, consumer prices increased by 2.9% in August, in line with analyst expectations and slightly above the July figure of 2.7%. Core inflation, which excludes food and energy, was also in line with estimates at 3.1%. Again, the inflation data was reassuring given earlier concerns about the impact of Trump tariffs on US consumer goods prices.

 

In China, consumer prices fell more than anticipated in August, while deflation in wholesale prices continued. Retail sales were also weaker than expected in July, while industrial output growth softened. Calls have intensified for Beijing to undertake further measures to boost sluggish domestic demand and mitigate the decline in export growth due to Trump tariffs.

Read our latest investment insights from Alpha PM

 

Brent oil remained around $67 despite concerns of further escalation in the Middle East following Israel’s strike on Qatar.

Finally, ‘you reap what you sow.’ There are many reasons why the price of gold has hit a record level. However, amongst these is the fact that both China’s and India’s central banks are continuing to buy gold in favour of US Treasuries. China is trying to break America’s stranglehold on global financing, while Trump has clobbered India with additional punitive tariffs.

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