Calm amid Brexit panic
The most remarkable aspect of the financial markets ahead of today’s meaningful vote on Theresa May’s Brexit deal is their calmness.
The pound is trading at close to its best level against the dollar in two months, at $1.29.
So there is no panic there. The FTSe 100 is down under 1pc in latest dealings. But the drop in global shares is as much to do with an unexpected fall in China’s exports in December, a 1.7pc dip in eurozone industrial production between October and November, and the shutdown in Washington.
Indeed the big concern must be that with China slowing rapidly, gloom in the euro area and the stalemate in Washington – costing output and jobs – the world is potentially heading towards recession.
Overall the gilts market, where a loss of confidence in the UK might be most felt, has been stable with the ten-year bond yield static at 1.26pc.
The only sign of a wobble is among inflation-linked index bonds, favoured by overseas investors, where the yields have climbed. This suggests fears that the pound could depreciate, pushing up inflation.
By the standards of the past, the rise in the yields of index-linked bonds looks minor league. It is nothing like a gilt-buying strike. If there is a conclusion to be drawn from the market reaction to Brexit uncertainty so far, it is that big financial players believe the most likely outcome after the vote is a softer deal. This would perhaps involve being closer to the customs union rather than a cliff-edge, unpredictable Brexit. But we should never underestimate the capacity of rogue hedge funds to deliver a shock.
Going nuclear
There can be no surprise that Japanese giant hitachi is considering pulling out from the new nuclear plant at Wyfla in North Wales, where it has already invested £840m.
Making new nuclear pay is an uphill task, which is why UK investors have been reluctant. It is also why, in the past decade, we have seen Germany’s big two power firms, rWe and eon, withdraw from pledged investment in nuclear projects, and an overextended Toshiba pull the plug.
Britain’s coalition government decided to back new nuclear in 2013 as a means of ensuring the UK had the security of power generation as the ageing fleet of coal plants come off the grid. This is less about the lights going out than making sure industry doesn’t come to a halt.
Should the hitachi investment fall through, there are a couple of options. The first is to decide that the greening of the economy means that the UK can get by with renewables and more natural gas plants in the future. After all, the US’s success with fracking means the world is awash with natural gas.
The difficulty with this is the same as it has always been. It would put the UK’s energy supplies at geo-political risk from Middle-east producers, russia and the reliability of the Langeled pipeline from Norway. This is especially true because the UK’s gas storage capacity is negligible.
An alternative is to start thinking of energy production as a regulated industry rather than a free market.
The May Government went down this route for the consumer when it put a cap on prices, essentially throwing a spanner into the competitive marketplace.
If nuclear power plants were part of a regulated supply market, Ofgem or the Treasury could offer investors a guaranteed return of say 3pc or 4pc above inflation, over the lifetime of the facility, as with, for example, the water utilities.
This would be enough to attract private equity, infrastructure investment funds and the Canadian or Australian superannuation funds of one kind or another.
The nuclear projects would no longer be dependent on keeping one investor sweet, as in Wyfla or at hinkley Point.
It is high time for some original thinking. But there isn’t much of that around within the current dysfunctional Government.
White night
The sale of British beauty and spa brand elemis to hong Kong-quoted Provence-based skin products L’Occitane for £700m is a bit of a triumph.
That is a huge number of pots of its £145 wrinkle-smoothing night creams.
It looks to be another boost to the fortunes of Bahamas-based private equity controlled Steiner Leisure.
In-the-money Ocado chief executive Tim Steiner is a great-grandson of the cruise and beauty company’s founder.