Going nuclear

 

Nuclear power is back on the global agenda.

Nuclear power is back on the global agenda, not least because of developments in Iran!

When Chancellor Rachel Reeves recently delivered the government’s Spending Review, she announced ‘In place of decline, I choose investment. In place of retreat, I choose national renewal.’ The relaxing of the Chancellor’s fiscal rules will allow billions more to be invested (borrowed), which will be spent over the next parliament.

This involves £113bn of debt-funded capital projects. Within these, nuclear energy leapt out with a £14.2bn commitment to Sizewell C in Suffolk and £2.5bn allocated to Great British Energy, the state-owned company to support a new generation of small modular reactors (SMR).

PM Sir Keir Starmer said he is ‘not writing a blank cheque’ to pay for a new nuclear plant, but it is hoped that the government’s commitment will encourage private sector investment to enable building work to get underway. Sizewell C also ticks boxes for the government in tackling climate change, job creation with up to 10,000 workers required over the life of the construction project and boosting UK economic growth. However, a final decision on the funding model is not expected until later in the summer. Sizewell C is expected to cost in excess of £20bn to build, although sceptics suggest this could be double that amount, pointing to Hinkley C. EDF’s original estimate of £26bn has already ballooned to more than £40bn, as well as needing Chinese State funding and is also five years late!

More promising are the potential SMRs being developed by a Rolls Royce-led consortium. Each SMR typically generates 300-400 megawatts of power, far less than either Hinkley C or Sizewell C but these will be much cheaper and faster to roll out.

While many may prefer renewables-such as wind and solar rather than nuclear, a reliable rather than intermittent energy supply will be required given the ‘electrification’ of the UK such as AI, heat pumps and EVs. Significantly, in the US, the tech giants such as Microsoft and Meta are investing in long-term nuclear power supply deals as they more readily understand the future energy demands of an AI powered world.

The government has already admitted that ‘low carbon technologies can be more expensive to run than fossil-fuel powered alternatives.’ The government needs to get a grip on electricity costs and security if UK businesses are to thrive. This morning it has announced plans to lower energy costs for thousands of UK businesses, by exempting them from some green energy levies.

This is good news, that may be overshadowed in the short-term by developments in the Middle East, with ramifications for oil and global energy prices.

What have we been watching?   

Talking of going nuclear, there was a dangerous turn of events in the Middle East over the weekend. Trump’s ‘within two weeks’ became within two days as the US launched air strikes on Iran’s nuclear facilities. The question for markets is whether Iran will undertake retaliatory action by attacking US interests in the Middle East where up to 6,000 American troops are located. If American military personnel were to be killed, Trump would no doubt order even greater attacks on Iran. In addition, Iran could look to weaponise oil by closing the Strait of Hormuz which carries over 20% of the world’s oil as well as significant amounts of gas.

The US has appealed to China to try to prevent Iran going down this path. World leaders are calling for ‘de-escalation’, but Israel looks intent on further weakening the Iranian regime and the risk of further escalation remains. Brent oil has moved above $78 this morning. Investors will be hoping Iran does not close the Straits of Hormuz as memories of Russia’s invasion of Ukraine and the spike in energy costs are still fresh in mind and the consequences being felt even today.

Central bankers will be mindful of the potential inflationary pressures and risk to global economic growth. Not surprisingly, given developments in the Middle East and the uncertainty of trade tariffs (the end of the 90-day deferment is 9th July), the Federal Reserve (Fed), Bank of England (BoE) and Bank of Japan (BoJ) all opted to keep interest rates on hold.

 

In the UK, CPI inflation for May was unchanged at 3.4%. While, services inflation is coming down, goods inflation, particularly food prices are still rising. Near term inflation is tracking close to BoE forecast although energy prices are starting to rise due to developments in the Middle East. The BoE left interest rates unchanged at 4.25% but the 6-3 vote was tighter than expected with three dissents for a 0.25% cut. Markets now expect the BoE to cut by another 0.25% in August.

 

 

In Europe, CPI inflation for May dropped to 1.9% while services inflation slowed to 3.2%.

 

In the US, the Fed kept the funds rate unchanged at 4.25%-4.5%, as widely expected. This was despite Trump demanding that interest rates ‘should be like 2.5% lower.’ Fed Chair Jerome Powell said the central bank was ‘well positioned to learn more’ on the impact of tariffs over the summer which suggests it is in no hurry, even as ‘modestly restrictive’ policy suggests rate cuts are still likely later this year. Markets still expect a US interest rate cut of up to 0.5% in December. Meanwhile, US economic data remains sluggish. Retail sales fell by 0.9% in May which was a bit weaker than expected, industrial production dropped by 0.2% while residential construction fell to a 5-year low.

 

The BOJ left interest rates unchanged at 0.5% as widely expected. More significantly, it announced that it intends to slow the rate at which it reduces its bond purchase programme from April next year by half to 200bn yen per quarter. This is expected to minimise market disruption while still providing support for the Japanese economy amidst Trump’s trade tariff uncertainty.

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Brent oil climbed above $78 to a new 4-month high, as the risk of possible Iranian retaliatory action against the US and its allies grew, including  disrupting shipping through the Strait of Hormuz.

Finally, gold had overtaken the euro as the second most important reserve asset for central banks according to information from the European Central Bank. The stock of gold held by central banks is approaching the historic highs of the post-war Breton Woods era. While gold does not earn interest, it is not exposed to sanctions and is liquid making it the ideal alternative asset choice for the likes of China and Russia. What a pity Gordon Brown sold a lot of the UK’s gold reserves at a low-point or the ‘Brown Bottom’ as it came to be known.

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