Jeremy Warner's Outlook: High refurbishment costs cause expectations to return to reality with a bump at M&S

Trouble at the Bank of England; Rare knock for hedge funds at Euronext

Profits are in full recovery mode, like-for-like sales are higher, footfall is growing by the minute and margins are back to respectable levels. Why then the negative reaction in markets yesterday to Marks & Spencer's annual results?

The answer lies in the old stock market adage that it is better to travel hopefully than to arrive. The turnaround in M&S's affairs is already seen by the City as largely over. Having enjoyed a fabulous revival in the share price, M&S can only really disappoint from here on in.

Instead of the positive, investors chose yesterday to focus on the negatives in the statement - the 7 per cent growth in costs, the £520m-£570m of refurbishment spending which Stuart Rose, the chief executive, is committing the company to this year, and the fact that redesigned stores seem only to produce a 10 per cent uplift in sales.

There's no doubting the turnaround in M&S's fortunes. Helped by brilliant marketing - Twiggy and the food pornography - the brand is once more seen as both classy and value for money. But City expectations have run ahead of themselves, and investors seem to have forgotten the grim reality of the British high street.

M&S was never likely to be a go-go growth stock for long. Instead, it is beginning to grow back into its old position, lost in five years of turmoil, of reliable blue chip. If they are to have a long-term future, such companies must invest in it. For a while there, the stock market seemed to forget that this applies to M&S too.

Trouble at the Bank of England

David Blanchflower, the Bank of England's newest recruit to the Monetary Policy Committee, today makes an appearance at the Billy Smart's circus otherwise known as the cross party select committee of MPs on Treasury affairs.

This can be a gruelling affair comparable in many respects to the ancient sport of bear baiting. One of his predecessors was invited to agree that in terms of his expertise in economics he was more Kidderminister Wanderers than Premier League, while another was outed for having copied his written answers from previous respondents. Another still was accused of not having any qualifications for the job at all.

As the co-writer of that seminal work, Money, Sex and Happiness: an Empirical Study, Professor Blanchflower can scarcely expect a gentler passage. This comes up with such startling conclusions as "married people have more sex than those who are single, divorced, widowed or separated". Believe it or not, "the happiness-maximising number of sexual partners in the previous year is calculated to be one", while "homosexuality has no statistically significant effect on happiness".

There's quite enough for the MPs to get their teeth into here, and that's before they even broach the subject of why Professor Blanchflower's wife ran off with another woman. How would the empirical study answer that one? Yet it is less Professor Blanchflower's personal life, or even his qualifications as "an internationally renowned economist" that will concern the Treasury committee as the fact that he plans to commute from the US for his three day a week job on the MPC.

Even the Court of the Bank of England thinks this a pretty poor show, but since the appointment is the Chancellor's, there's not a lot they can do about it. As things stand, the procedures for appointing members of the MPC are opaque and unsatisfactory.

The Chancellor directly appoints four of the nine, while the Governor and two deputy governors are appointed by the Queen on the recommendation of the Chancellor. The final two members of the Committee are appointed by the Governor, but only after consultation with the Chancellor.

In these circumstances there is a high risk that the committee becomes stacked with the Chancellor's cronies, or Fogs (friends of Gordon's) as they are sometimes known. Nobody believes that this is in fact the case, but credibility is a fragile flower in markets and it would never do for it to be thought the MPC was doing the Chancellor's bidding.

In the US, presidential appointments to the Federal Reserve are subject to veto by the Senate, whose vetting of candidates is a good deal more thorough and professional than that of the Treasury select committee. As things stand, MPs cannot block, they can only criticise. Don't expect Mr Brown to concede such a self-evidently commendable approach as the US one anytime soon.

Rare knock for hedge funds at Euronext

Christopher Hohn, the London-based hedge fund manager who runs the deceptively named Childrens' Investment Fund (TCI), may have made his clients an awful lot of money playing the stock exchange consolidation game, yet it now seems that this was more by luck than judgement.

By acquiring big stakes in Deutsche Börse and Euronext, Mr Hohn hoped to play god in deciding who got hitched to whom, blocking deals here and firing obstructive chief executives there. Yet as it turns out, he was completely wrong to have prevented Deutsche Börse's planned acquisition of the London Stock Exchange, while his subsequent insistence that the miscreant chief executive, Werner Seifert, be fired, appears to have been motivated more by spite than anything else.

By contrast, Mr Seifert's plans look with the benefit of hindsight to have been inspired. He was offering 580p a share for the LSE, which if he had succeeded at anywhere close would today have looked a complete steal. The shares have more than doubled since. Even if Deutsche Börse thought the company still worth the price, the LSE is today out of its reach, with Nasdaq the holder of a sizeable blocking stake.

At the same time, TCI's grand plan to bring about a merger between Deutsche Börse and Euronext now seems dead in the water. Euronext has instead opted for takeover by the New York Stock Exchange, while the hedge fund sponsored resolution to force a merger with Deutsche Börse was decisively rejected at Euronext's annual meeting yesterday.

It may be quarter to midnight, but the partners have changed with such frequency in this orgy of deal making that anything is still possible. Hedge funds are like hydras. Cut one head off and another grows in its place; they never give up. Still, at this stage of the game, it looks as if it will be Deutsche Börse that's left out in the cold. Was this in Mr Hohn's plan too? Me thinks not.

Yet he won't feel too aggrieved. Despite the calamitous losses he will have suffered on his Deutsche Börse stake in recent days, he's still very substantially up on the prices he bought for.

Mr Hohn has always faced a clear conflict of interest in trying to push Euronext into an unwanted merger with Deutsche Börse. With 10 per cent shareholdings in each, he wants to see a deal which is value enhancing for both of them.

He doesn't care a fig that the NYSE transaction is worth more to Euronext shareholders as a whole than the Deutsche Börse proposal. He's also got his Deutsche Börse investment to look after. In the round a Deutsche Börse merger is worth more to him than the rival NYSE proposal, and in his pursuit of self-interested short-term gain, he was determined to have it.

Well, it seems that he's been outmanoeuvred. Deutsche Börse yesterday made a last ditch attempt to claim the Euronext prize by announcing takeover terms which it insisted were superior to the rival NYSE bid both in terms of value and likely synergies. Both claims are pure fiction and, in any case, Deutsche Börse's efforts to merge with Euronext are highly vulnerable to regulatory veto or interference. The two companies' combined grip on futures trading, clearing and settlement is unlikely to be acceptable to exchange users.

While Mr Hohn counts his money, Mr Seifert, now relocated to Ireland, will at least be able to console himself with schadenfreude.

j.warner@independent.co.uk