Friday 08/03/24

1. In BIG PICTURE NEWS, the ECB looks at a June rate cut, Hunt takes £200m from councils, Chinese trade is boosted by Russia, Washington pushes for more China restrictions, Apple faces an EU probe, AI’s predicted to suck energy and UK wage expectations calm
2. In M&A NEWS, Nationwide buys Virgin Money, Mondi bids for DS Smith and Warner chases Believe
3. In MISCELLANEOUS NEWS, Rivian unveils new EVs, Rentokil revenues jump, Aviva’s profits rise, Darktrace strengthens but ITV has a ‘mare
4. AND FINALLY, I bring you sunglasses that are made out of jeans!

So the ECB looks to a summer interest rate cut, Hunt takes from councils, China gets a Russia boost, Washington wants more China restrictions, Apple’s in trouble, a report says AI will be a major energy drain and UK wage expectations slow down…

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

Christine Lagarde signals June rate cut as ECB lowers inflation forecast (Financial Times, Martin Arnold) shows that the ECB has indicated that June would be the earliest it would consider cutting interest rates following the lowering of its forecasts for inflation. It thinks that inflation will hit its 2% target in 2025 and left its benchmark interest rate at 4%. * SO WHAT? * Well there’s not much faffing around here – this is a clear signal. If anything changes now Lagarde’s going to have to explain herself. Worries remain, however, about the potential for wage growth to push inflation up again.

Then in the UK, Jeremy Hunt pulls £200m from councils after clawing back house sale funds (Financial Times, Peter Foster and Jennifer Williams) shows that the chancellor has decided to end a policy that allowed local authorities keep 100% of the revenues they got from the sale of council homes. The policy was due to come to an end in April, but there had been pressure to extend this deadline. It is estimated that this policy boosted council budgets by a healthy £180m-£200m a year. Originally, under the Right to Buy scheme, tenants of council houses could buy their homes at a discount to the market value on a sliding scale depending on how long they’d lived there. Local councils tended to give 20-25% of the revenues generated from this to central government, depending on what sort of arrangements they had. Last year, however, the government’s levelling up department said they could keep 100% of these receipts to help councils “invest in new social homes for local people”. * SO WHAT? * This is going to be major headache to already cash-strapped councils but then again it sounds like this was only a temporary measure anyway. You do wonder whether the councils spent the money in the way that the government intended or whether they had to just use it for other things to keep afloat. There’s already a shortage of housing but the situation for social housing has been made worse by councils not necessarily sticking to an agreement made in 2012 that each council house sold under the scheme should be replaced on a one-to-one ratio. According to the Local Government Association, 110,000 homes have been sold under this scheme since 2012 but only 44,000 of them have been replaced. The decision NOT to extend the right for councils to retain 100% of these revenues is clearly not going to go down well…

Meanwhile, in trading news, Chinese trade rebounds on electronics and exports to Russia (Financial Times, Joe Leahy and Nian Liu) shows that China’s foreign trade grew significantly faster than the market expected in the first two months of the year helped in part by exports to Russia. * SO WHAT? * China’s economy has been hit by an ongoing property crisis, weak consumer and investor confidence and it saw a drop in export earnings last year. Certainly, a recovery in exports will help the country to hit its 5% annual GDP growth target for this year! Russia has risen rapidly as an export destination for Chinese goods and it became China’s fifth biggest single-country trading partner last year. China’s trade with India and Brazil has also boomed.

However, Washington pushes allies to tighten China chipmaking restrictions (Financial Times, Christian Davies, Qianer Liu, Kana Inagaki and Andy Bounds) shows that the US is putting pressure on Japan and the Netherlands in particular to put further restrictions on exports of chipmaking equipment to China. * SO WHAT? * This is in response to Chinese tech companies such as Huawei and SMIC making great strides in their capabilities despite current restrictions imposed in October 2022. The restrictions of high-tech exports was ostensibly made to limit China’s ability to build or maintain high performance chips that could be used for military purposes but cynics would say that this was just an excuse to blunt China’s tech capabilities more widely. Japanese and Dutch companies specialising in the manufacture of advanced chip-making equipment (e.g. ASML and Tokyo Electron) are being pressured by Washington to tighten existing restrictions by doing things like banning exports of less sophisticated machines and putting in place restrictions on servicing and repairs. Washington is also trying to get South Korea on board with this to put in place similar controls although the chipmaking equipment they make isn’t as sophisticated as the stuff the Japanese and the Dutch make. Although this might limit China’s capability in the short-term, this can’t go on forever and China can afford to just chuck money at it to close the gap. When it does that, it just won’t NEED Western companies at all…

Meanwhile, EU probes Apple over App Store shutdown of Epic Games (Financial Times, Michael Acton) shows that the European Commission is examining Apple’s decision to ban Epic Games from its App Store. The EC is going to investigate under the Digital Markets Act, which is designed to limit the power of Big Tech but would also consider whether it has breached any other EU laws. Apple has said that it kicked Epic out using the terms of the 2021 US court ruling, which basically said it could kick out whoever it wanted to but Epic argues that Apple is abusing its power in the market. * SO WHAT? * If Apple is found to have breached the DMA, the EU can impose fines of up to 10% of their annual turnover for failing to comply. This can go up to 20% in cases of repeated breaches and then forced potential break-ups. Apple continues to face a rough ride in Europe as it was fined earlier this week for breaching EU antitrust rules on music streaming and last week the tech giant was forced to reverse its decision to remove web-based apps in the EU that bypass its App Store.

Then in energy-related news, AI likely to increase energy use and accelerate climate misinformation – report (The Guardian, Oliver Milman) cites a report by the Climate Action against Disinformation group which says that AI will cause an increase in energy use (from the proliferation of data centres which absorb huge amounts of power) and give a major boost to the spread of climate disinformation. * SO WHAT? * Some Big Tech companies have portrayed AI as playing an increasingly pivotal part in the fight against global warming, the tracking of deforestation, identification of pollution leaks and tracking of extreme weather events. However, environmental groups say that AI will be a net negative because of all the power it drains and how climate science falsehoods could easily be spread. The report concludes that there should  be more transparency about AI energy use and that there should be more safeguards in place to monitor the output of climate misinformation.

Then in Private sector expects wages growth to slow (The Times, Mehreen Khan) we see that a monthly survey of 3,000 CFOs shows that the momentum in wage growth in the private sector is expected to slow down over the course of this year. * SO WHAT? * This will probably be welcomed by the Bank of England as persistently high wage inflation has been a major reason for it deciding against cutting interest rates too early.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Nationwide buys Virgin Money, Mondi makes an offer for DS Smith and Warner bids for Believe…

Nationwide to buy Virgin Money in £2.9bn deal (The Guardian, Kalyeena Makortoff) shows that the Nationwide building society has agree to buy its high street rival Virgin Money for just shy of £3bn in the UK’s biggest banking deal since the 2008 crisis. If the deal goes ahead (it’s still got to be formally approved by Virgin Money shareholders, but as a mutual building society it doesn’t actually need approval from its own members to go ahead) it would consolidate Nationwide’s position as the UK’s second biggest mortgage lender after Lloyds Banking Group and narrow competition with the so-called “Big Four” banks. Virgin Money’s share price shot up by 34% on the news. Nationwide shows challenger banks’ failure with cut-price bid for Virgin Money (Financial Times, Lex) shows that although the takeover price is a 40% premium to the three-month average price, Nationwide is actually getting a good deal here in an action that will make it the UK’s second biggest bank in terms of mortgages and savings. Although UK rivals might be vaguely interested in this deal it looks unlikely that they’ll table rival offers because there would probably be antitrust concerns from the regulator and smaller challenger banks probably wouldn’t have the necessary firepower to launch any offers either. * SO WHAT? * This may prompt further consolidation in the sector particularly among challenger banks that will feel even more pressure from another big competitor. Big banks face fresh threat from ghost of Northern Rock (Daily Telegraph, Michael Bow) looks at how this new competitor to the Big Four will be good news for competition in the sector while Offer marks latest step in march of the mutuals (The Times, Patrick Hosking) highlights a sector that is already showing signs of consolidation as Coventry Building Society and The Co-Operative Bank have been in exclusive talks for the last three

months. Given that the fat margins they’ve been enjoying in the last few years of high interest rates are probably going to fall from here, it seems like a good time to engage in a bit of consolidation with a view to streamlining operations going forward if they need to.

Elsewhere, Mondi’s £5bn bid for DS Smith set to create packaging giant (The Times, Helen Cahill) highlights a bold move by Weybridge-based packaging company Mondi in its all-share offer to buy its smaller London-based rival DS Smith in a deal that would create a serious £10bn player in packaging. This combination has been debated since the pandemic boom in online shopping. If the deal went ahead it would create Europe’s biggest manufacturer of corrugated cardboard to make packaging and boxes, with a market share of up to 13% – and there would be some decent cost savings to be had as well. Mondi shareholders would own 54% of the enlarged group, with DS Smith owning the 46% remainder. * SO WHAT? * This sounds like a decent enough combination but I would have thought that it would have got a more rapturous reception if it had been an all-cash offer as all-paper offers smack sometimes of desperation. Still, it does show that M&A activity seems to be increasing and CEOs have growth on their minds now!

Then in Warner kicks off bidding war for French music group Believe (Financial Times, Adrienne Klasa and Daniel Thomas) we see that Warner Music Group has thrown its hat in the ring to buy French digital music company Believe less than a month after a couple of private equity firms (EQT and TCV) launched an offer to take Believe private for €15 a share. Warner is planning to table a bid of €17 a share – potentially in cash. * SO WHAT? * Warner is the world’s #3 music group after Universal and Sony and the offer is so far preliminary as it needs to do its due diligence before submitting a formal offer. The appetite for M&A is clearly growing!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Rivian unveils more EVs, Rentokil revenues benefit from Paris, Aviva’s profits rise and Darktrace puts in a solid performance but ITV has a shocker…

In a quick scoot around some of today’s other interesting stories, Rivian Unveils Two Lower-Priced EVs as It Seeks to Jump-Start Sales (Wall Street Journal, Sean McLain) highlights Rivian’s unveiling of two new SUVs yesterday which the troubled EV maker is hoping will spark a boom in sales, Rentokil revenue jumps as bedbugs crawl over Paris (Daily Telegraph, Daniel Woolfson) shows that pest control business Rentokil has been benefitting from Parisian businesses keen to clear out insects, rats and other pests ahead of this summer’s Olympics (Paris was overwhelmed by bedbugs last year!) and Aviva’s profits rise as demand for UK private health insurance booms (The Guardian, Julia Kollewe) shows that Britain’s biggest general insurer benefitted from booming demand in the UK for private health insurance as NHS waiting lists got longer.

Then in Darktrace cybersecurity firm going from strength to strength (The Times, Tom Saunders) we saw that the cybersecurity company enjoyed a strong six months with revenues rising by 27.4% year-on-year and was confident enough to up its full year forecasts for sales. * SO WHAT? * This upgrade in forecasts was particularly impressive given that rivals Palo Alto Networks, Darktrace’s American rivals, warned last month of “spending fatigue in cybersecurity”. Conversely, Darktrace said that it was seeing a notable uplift in its sales conversion rate in North America…

Elsewhere, ITV risks job losses in cost-cutting drive as ad revenues fall (Daily Telegraph, James Titcomb and James Warrington) shows that the company announced plans for additional cuts thanks to an ongoing slump in advertising revenues. It had managed to complete a £150m cost savings plan one year ahead of schedule and it said that it would now embark on another restructuring programme to cut another £50m a year. At the moment, the company is reluctant to commit to whether this will involve further redundancies. Tricky. But if interest rates come down, consumer and business confidence rises as a result of falling interest rates, things could still turn around – but not just yet.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

I saw this video and thought it was fascinating! What a random idea!!! And no, I have no affiliations here – I just respect someone who had a crazy idea and went all in despite all the naysayers! I can identify with that 😁