The Wisdom of Solomon

The White House has warned the Solomon Islands that it will “respond accordingly” if a security pact with China leads to a Chinese military presence in the Pacific Island nation.

The Solomon Islands are strategically located off the North-East coast of Australia and details of the agreement with China have not been made public.

The Solomon Islands PM Manasseh Sogavare has defended his nations right to seek security deals with China, besides existing infrastructure and business investments. This is a well-developed strategy by China which has followed a similar path in Sri Lanka and parts of Africa.  It is understood the agreement sets out clauses where China could send naval ships for ‘stopover and transition’ in the islands – raising concerns about a potential military base. Currently, Australia has a security agreement with the Solomon Islands to allow a rapid deployment of Australian troops for peacekeeping, given the long history of violent unrest.

This is not just a big deal for Australia, as it has recently become the regional partner of the AUKUS alliance with the US and UK to counter China’s presence in the Pacific.

China is the world’s second largest economy and an increasingly important market for many companies. However, in the wake of the invasion of Ukraine and China’s long-term strategic goals, many western companies may now be re-evaluating their global supply chains. Expect more to re-onshore the manufacture of key components to the US and Europe or to neighbouring countries such as Vietnam.

What have we been watching?

Higher interest rates and weaker consumer spending concerns re-surfaced last week. It was another week of turmoil for global bond investors as they considered the pace of US interest rate increases   with the US 10-year Treasury yield moving above 2.9%. The prospect of higher US interest rates has hit American equities with the S&P index more than 10% lower so far this year. The UK cost-of-living crisis saw Sterling slip against the US Dollar to $1.275. The war in Ukraine shows no sign of ending while in China, the Covid-19 outbreak has spread from Shanghai to Beijing.

The IMF cuts its global economic growth forecast for 2022 from 4.4% to 3.6% as prospects have worsened significantly with countries closest to the war in Ukraine likely to be the hardest hit. The IMF warned sanctions on Russian oil and gas would raise inflation further, requiring higher interest rates. The IMF’s chief economist said ‘we’re facing a slowdown in growth and facing elevated inflation. In a matter of a few weeks, the world has yet again experienced a major, transformative shock. Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the war has created the very real prospect that a large part of the gains will be erased’.   The IMF warned that the European Central Bank was in a ‘much less comfortable position’ than the US Federal Reserve.

Russia does not appear to have secured any major breakthroughs in east Ukraine in its latest offensive according to US analysis. Meanwhile, Putin has tested the ‘world’s deadliest weapon’ the Satan II nuclear missile that carries a dozen warheads and can strike anywhere on the planet. Chinese President Xi Jinping has re-stated Beijing’s opposition to sanctions. With China diplomatically ‘sat on the fence’ and continued stiff resistance from Ukraine’s military forces, the war looks as if it could drag on for months unless Russian forces can deliver a face-saving success for Putin to coincide with the Great Patriotic War 9^th May Victory Day parade. The US announced an additional $800m security assistance package for Ukraine.

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The IMF cut its UK economic growth forecast for 2022 from 4.7% to 3.7% but also cut the 2023 outlook from 2.3% to 1.2%. The UK is therefore expected to now have the slowest growth amongst the G7 economies in 2023. April’s flash UK PMI business activity indicators showed demand slowing, with the service sector most affected by the cost-of-living crisis. The headline composite index slipped to 57.6, a three-month low.

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Emmanuel Macron has won five more years as French president after a convincing win over rival Marine Le Pen. Disappointing news for Putin and a sigh of relief from the EU.

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In the US, interest rate futures now see four hikes of 0.5% each at the Federal Reserve meetings between May and September.

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In China, President Xi Jinping made a televised speech defending the country’s zero-tolerance Covid-19 policy. Beijing has now started mass testing for millions of residents after a spike in cases prompted panic buying at supermarkets, as fears grow the capital could face a similar situation to Shanghai. This would not only slow the Chinese economy further but add to global supply chain disruption.

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Brent oil eased back to $102 on concerns about Chinese demand as the Covid-19 outbreak spread to Beijing. In addition, Germany ruled out an immediate end to Russian oil imports but is moving as fast as possible but admits it will take time.

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Finally, another example of global supply chain driven inflationary pressure. The prices of fridges, freezers and dishwashers are up by a third since last year and set to climb higher according to a leading UK white goods wholesaler. Lockdowns in China and higher transportation costs are the primary reasons. Delivery times have also lengthened from 6 months to between 12-14 months. No wonder the global economy appears to be cooling.

 

Read Last Week’s Alpha Bites – Bringing Home the Bacon

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.