Russian Roulette

Japan has recently announced its intention to re-start some of its nuclear power plants. These were shut down following the Fukushima disaster in 2011 when the earthquake and tsunami caused a meltdown at the nuclear power plant. The decision to re-start has no doubt been driven by spiralling energy costs as Japan has been a big importer of Liquified Natural Gas (LNG).

Meanwhile, Tepco, the operator of the Fukushima Daiichi plant has estimated it will take between 30-40 years to completely decommission the site. However, Tepco has recently postponed the removal of radioactive fuel debris which, was originally expected to start this year, by some 12-18 months. This is due to delays in the development of a remote-controlled robotic arm to remove the nuclear fuel.

In Europe, due to Putin cutting off gas supplies, Germany is to keep two of its three remaining nuclear plants on stand-by until mid-2023. The UK government recently considered extending the life of Hinkley Point C but didn’t act quickly enough and operator EDF shut it down. Meanwhile, France, one of Europe’s top electricity exporters, may not produce enough nuclear energy this winter to help its European neighbours. France has recently become a net importer of energy after a series of repairs were required at some of its nuclear power plants.

One of the ways we are told we can all help the planet is by ‘making do and mend’ rather than buying new. It is quite worrying that governments are having to extend this principle to nuclear power to keep the lights on this winter. Even more alarming is the thought of nuclear power plants caught in the middle of a war zone. The head of the UN nuclear agency has warned that the situation at the Russian-held Zaporizhzhia nuclear plant is ‘becoming increasingly precarious’ as it could already be fully reliant on emergency diesel generators. The world does not want to see yet another nuclear disaster.

What have we been watching?

Markets focused on the latest business activity indicators which showed a number of economies in contraction, namely Japan, Germany, Italy and the UK. Meanwhile, China has placed some 70 cities in full or partial Covid-19 lockdown which is likely to impact its economic recovery and could once again lead to some supply chain disruption. The response of central banks to inflation was also in focus with the European Central Bank (ECB) hiking interest rates by 0.75%. The US Dollar continued to strengthen on the weaker global economic outlook although saw quite a reversal on Friday leading to a tentative recovery in risk appetite. The Dollar strength, together with the UK’s energy plan, saw Sterling trading at its lowest level to the Dollar since 1985 although on Friday it rallied to $1.16.

There was a small crumb of comfort for central bankers on the inflation outlook. The UN’s Food Price Index fell for the fifth month in a row in August to 138 and now stands below the level before Russia’s invasion of Ukraine. The cost of food has been amongst the main contributors to inflation. Cereals have been one of the main drivers of higher food prices. Ukraine has started shipping grain while all three of the other main exporters -Canada, USA and Russia have seen a slightly better than expected harvest. However, Ukraine’s harvest next year is expected to fall by 20% while globally fertiliser costs remain very expensive.

The Ukrainian counter-offensive appears to be re-gaining significant amounts of territory and is Putin’s biggest set-back so far. Revenge missile strikes on Ukrainian power facilities have led to black-outs. Russia is reported to be buying drones from Iran as well as missiles and artillery shells from North Korea. Putin has also continued his economic attack on Europe by halting gas supplies through the Nord Stream pipeline. European gas prices had retreated from record highs but moved higher on this development. However, the increase was not as bad as markets initially feared and prices have subsequently eased back again.

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In the UK, ‘cometh the hour, cometh the woman’ but can new PM Liz Truss avert the crisis? She is the fourth Conservative PM in just six years and faces a race against time to tackle the cost-of -living crisis. UK gilt yields moved higher as markets started to consider the scale of government support and borrowing. At one point, the 10-year Treasury yield moved above 3%, an 11-year high however shorter -dated gilt yields edged back on the prospect that the energy price cap may lower inflation sooner. The Bank of England (BoE) expects the cap on energy bills to reduce the previous forecast peak in inflation with the PM suggesting a 5% reduction. Nonetheless, the market is still pricing in a 56% chance of a 0.75% interest rate hike by the BoE in September. The Bank of England postponed a key decision on interest rates in light of the period of national mourning.

Average UK household energy bills will be capped at £2,500 a year from October and will last two years. The help for industry is opaque, as businesses will also get a support package but for six months which will provide ‘equivalent support’. New Chancellor Quasi Kwarteng will confirm the cost of the energy package in a fiscal statement later this month. The cost of supporting households is thought to be between £90bn-£100bn while that for businesses could be over £30bn. Markets wait to see where this leaves UK government finances.  Part of the cost, perhaps £30bn could be offset by a reduction in inflation related payments such as pensions and index-linked gilts.  

 

The Eurozone composite business activity indicator PMI of 48.9 was an 18-month low and implied a second straight monthly contraction for the region’s economy. The ECB hiked interest rates by 0.75%. It also raised its inflation outlook for 2022 to 8.1% which is forecast to fall to 5.5% in 2023 and 2.3% in 2024. The ECB also lowered its economic growth outlook for the region, cutting 2023 from 2.1% to just 0.9% with a recovery to 1.9% in 2024. It has also drawn up a ‘really dark downside scenario’ in which the eurozone falls into recession next year. This includes the total shutdown of Russian gas supply which has already happened with the closure of the Nord Stream 1 pipeline!

 

The US August ISM non-manufacturing index improved to 56.9 with new orders up slightly and signs that supply bottlenecks and price pressures have continued to ease.  The Federal Reserve’s rhetoric suggests that a 0.75% interest rate hike at its next meeting later this month is close to a done deal.

 

In China, more than 70 cities with a combined population of over 300million have been placed under full or partial lockdown due to Covid-19. Chengdu, with a population of some 21million people was also hit by an earthquake. China trade data for August showed export growth weakening more sharply than expected as lockdowns hampered activity.

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Brent oil dropped to $88 before recovering to $92. Traders are still concerned about the global economic outlook. Iran is hopeful of being allowed to export oil if it reaches a nuclear deal with the US but, the problem now is that it is selling drones to Russia!

 

Finally, the end of an era with the passing of Queen Elizabeth II. The Queen reigned during a period of massive and rapid technological change from nuclear power and space exploration through to advances in healthcare and the growth of the internet – the latter perhaps the most significant for all of us. What technological advances will investors see during the second Carolean era under Charles III?

 

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