Meltdown

 

The recent heatwave has seen many winners, from pubs with outdoor gardens, to ice cream sellers. Businesses selling fans and air-conditioning systems must have had record sales. No doubt it’s the same across Europe. The problem though is generating enough power to keep us all cool.

EDF recently shut down the Hinkley Point B nuclear power facility after 47 years. This had been widely expected due to age on safety grounds, with cracks identified in the core of the reactor. Some industry experts believe it could have continued operating through this winter to plug the UK energy hole, but the UK government did not give EDF sufficient time to reverse the planned closure.

Nuclear power forms a key part of UK government net-zero carbon goal for 2050. Hinkley Point C is currently under construction and is due to open in 2027. Sizewell C has been given the go ahead and is due on stream in 2031.

Nuclear safety has once again become an issue with Russia’s invasion of Ukraine. The brief capture of Chernobyl by Russian forces was alarming as they damaged an administrative building while seizing the reactor. Ukraine has since taken back control of the region and nuclear facilities. However, the International Atomic Energy Agency (IAEA) is becoming increasingly alarmed by developments at Ukraine’s largest nuclear power plant.  Zaporizhzhia, is also the biggest in Europe, with six reactors and is on the banks of the Dnieper River, in South-East Ukraine. For days, Ukraine and Russia have blamed each other for attacks on the Zaporizhzhia site.

This is the first time a nuclear power plant has been occupied by a military force. Rafael Grossi, the IAEA’s director-general said he is ‘extremely concerned’ by reports of shelling at the nuclear power plant. The UN’s nuclear watchdog has called for an immediate end to any military action at Zaporizhzhia, warning of a ‘very real risk of a nuclear disaster.’

As well as the humanitarian crisis, Russia’s invasion has already sent a chill wind across the global economy through higher energy and food prices and disruption to supply chains. The Chernobyl nuclear accident was an appalling man-made disaster and we have to hope history does not repeat itself.  The only ‘fall out’ anyone wants to see, is between Putin and Western leaders.

What have we been watching?

Despite ongoing geo-political tensions, markets continued to focus primarily on US inflation data and whether we are getting closer to peak US interest rates. US inflation data for July came in below expectations and while ‘one swallow does not make a summer’ there are hopes in some quarters that the Federal Reserve’s (Fed) ‘front-end loading’ of interest rate hikes may be starting to do the job. Growth assets received a significant boost from the US inflation numbers – the US NASDAQ technology index rally from its mid-June low has now reached over 20%.

Markets may also have received a boost from the US earnings season. While, semiconductor chip manufacturer Micron issued a profit warning it does suggest that chip shortages which have plagued numerous industries, including car manufacturers, may be coming to an end. An increasing number of companies are starting to comment that global supply chains may be starting to normalise. If so, this would help alleviate some cost input inflationary pressures.  In addition, most commodity prices including oil and timber are well below their peak, while global freight rates have also moved lower.

Tensions in the Strait of Taiwan became more elevated as China extended its military exercises and Taiwan refused to be cowed by undertaking its own artillery firing practice drill. Clearly the hardliners in the Chinese regime have used the window of opportunity created by Nancy Pelosi’s visit to step up pressure on Taiwan. Markets must hope China is sabre-rattling and is not planning upon a full-scale invasion of Taiwan. We have been here before with the 1995/96 Taiwan Strait Crisis when China conducted missile tests in an alleged attempt to intimidate Taiwanese voters in the 1996 election. China’s military subsequently announced it had ‘completed various tasks’ around the self-ruled territory but Beijing warned it will continue to carry out ‘regular patrols.’  The situation in the Strait of Taiwan remain tense while relations between the US and China have deteriorated further.

Meanwhile, the war of attrition in Ukraine continues with equally alarming developments as highlighted above.  Russian media also suggested Kim Jong-un has offered Putin 100,000 North Korean soldiers to fight in Ukraine!

European gas prices have continued to rise. The drought across Europe has seen water levels in the Rhine fall to such a low level that it may prevent the shipment of coal leading to even more demand for gas. The fact that gas is almost back to the record level set at the time of Russia’s invasion of Ukraine in the middle of a European wide heat wave is quite alarming. Higher energy bills are adding to the cost-of-living crisis in the UK which has dominated news headlines.

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The UK economy contracted by 0.6% in June to leave the second quarter down by 0.1%, leaving annual growth at 1.9%. Discerning the true state of the UK economy from the second quarter data is tricky given bank holidays and less Covid-19 testing. The overall picture is sluggish, with household spending contracting, even before the worst of the cost-of-living crisis but with an increase in business investment. With interest rates rising much now rests on the new Conservative leader and actions taken by the government.

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Headline US CPI was flat in July, so the annualised inflation rate edged back to 8.5%, slightly below market expectations. Core inflation also pulled back to 5.9% with lower gasoline prices helping. Following the release of this latest inflation data, interest rate futures have shifted in favour of a 0.5% hike at the next Fed meeting in September.

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Chinese CPI inflation climbed to a two-year high, although was below forecasts at 2.7%. Food was the main driver with pork prices up by almost 21%. The People’s Bank of China announced unexpected policy easing by further trimming its key lending rate by 0.1% following weak July economic activity data. Property investment slumped. Industrial production was lower than expected while retail sales growth slowed to 2.7%.

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Brent oil continued to drift lower to $96 on concerns about the global economic growth outlook. However, the IEA said that some European energy generators were having to turn to oil given the spike in demand for electricity to power fans and air conditioning during the current heatwave.

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Finally, the number of people driving for Uber has hit an all-time high, as concerns about the cost-of-living crisis push people to find new ways to make money. About 5million people globally are now picking up passengers or making food deliveries for the company, an increase of 31% on last year. Uber had been struggling with a driver shortage previously due to the Covid-19 pandemic.

Read Last Week’s Alpha Bites – Don’t Rush to Pull the Flush

 

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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.