If you found a bunch of vandals had been increasingly interfering with your local gas taps and power supplies, then at least a round of ASBO’s would probably be in order. However, when a neighbouring nation seems to have developed such an aggressive habit then the issue is somewhat more worrying. Russia’s recent spat with its old fellow USSR member, Belarus, is the most recent example. Obviously this became a greater story for the rest of Europe as the potential for power supply interruption increased. On its own this might be just somewhat annoying but when linked together with other recent actions it may well be more concerning.

The Putin administration is certainly building up a reputation for increasing corporate and industrial interference. Now, I can understand the attitude of national pride of an ex-empire and super power trying to regain its position of influence, especially as the current premier tries to regain some of the assets “given away” during the somewhat alcoholic administration of his predecessor. That though may be little comfort for BP and Shell looking at the recent rearrangement of their Russian contracts but more importantly it affects the reputation for Russia as being a reliable partner to do business with. The national spats with Georgia, Ukraine and Belarus over gas and oil, as well as the beef export ban from Poland, all seem to smack of national petulance rather than addressing serious issues in an appropriate manner.

For Mrs Merkel in her role of leading Germany’s presidency of the EU, the relationship with Russia will be a key issue especially to ensure that power supplies to the Union are maintained in a reliable and consistent manner. The reliability and dependability of energy sources is going to be a crucial political, economic and commercial issue for us all. There is no point baiting this Bear, but it is equally going to be difficult to tame it.

***

Last week I briefly warned of the increased likelihood of rates rising earlier than expected this week, but nonetheless I was still surprised by the decision of the Bank of England’s Monetary Policy Committee. We shall have to wait a fortnight for their minutes to provide some further illumination into their thoughts, but it seems quite likely that they will have seen the December inflation figures and reacted accordingly – there is obviously going to be some unpleasant reading here. We will get to see the report later this week and be able to judge for ourselves but the market certainly has not ruled out another rise to come. There is inflation in the system but just how much we cannot tell. The Bears suggest that it could even push rates to a peak of 6% - and that would be a very serious “ouch” for the UK economy.

I suspect that the main reason for this pre-emptive action has been to show to the Chancellor and the Treasury that they have taken action as inflation is above the current target – this will be their reasoning in the letter that will have to be written from the Governor (strange, isn’t it, that we are the only nation where you have to write “lines” as a punishment for missing your target!).

The most important issue for investors I believe will be the value of Sterling and the increased likelihood of breaching the $2:£1 level. For footballers’ wives this might just be a further inducement for additional New York retail therapy outings, but for those companies with US$ earnings and dividends, then this is an increasingly serious concern. For a good proportion of FTSE 100 companies, namely the miners, pharmaceuticals and certain banks this will be an important issue. 

This week we should hear from the Bank of Japan who may also raise rates to 0.5%, which seems almost derisory compared to ours. However, even this small increase and total may impact the weak Yen and encourage it to show some signs of life against the other major currencies – not least of which the Pound - and may herald further cuts in the abundant liquidity supplied to the markets and in part responsible for the strong rise in the financial markets recently.

***

The concerns previously discussed over both emerging markets and commodities still seem to be there and the falls last week brought on by the current vogue of Latin American nationalisations has only added to the worries. However, a greater area for nervousness should be the impact of the slowing of the US economy and its falling demand for commodities and goods – with lower demand and commodities priced in a weakening $, they are at the wrong end of the food chain and thus are the ones more likely to suffer most.

***

I think one specific announcement is also worth noting from last week. After just over 30 years since the end of its civil war, Vietnam has become the 150th state to join the World Trade Organisation. From communist victory to capitulation to one of the great organs of capitalism in that period of time is astonishing. Welcome.

***

And finally……….the man in Canada who was charged with stealing cheese defended himself in court by saying he was a mouse – the defence argued entrapment, presumably?

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management

 

 

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