Friday 08/11/24

As readers of Watson’s Daily, you will no doubt understand the importance of “commercial awareness”. If you’d like to know more about it and how to improve it, I’m running a commercial awareness bootcamp with Jake Schogger of the Commercial Law Academy on Saturday November 16th. We only do this once a year, so if you’re interested now’s the time! We cover a lot of ground and it’s very reasonably priced for the huge amount you get. If this sounds like something you’d be interested in, click HERE to get registration and even details (for more about the event and the topics we’ll be covering, you’ll need to scroll down that page).

Federal Reserve cuts interest rates as Jay Powell says he will not resign as chair (Financial Times, Colby Smith) shows that America’s central bank has cut its benchmark interest rate by 0.25 percentage points to a range of 4.5-4.75%. This was widely expected and was a unanimous decision. When asked if he’d stand down if asked to by Trump, he said “No” and added that it would be unlawful for Trump to remove him. Trump actually appointed Powell in 2017 and reappointed him again in 2021 but the president-elect has not been particularly supportive of him in public.

The reality of Trump 2.0 continues to filter through and Trump win sparks renewables sell-off and pharma fears (Financial Times, Tee Zhuo, Benjamin Wilhelm and Gordon Smith) shows that hedge funds have made profits of over $1.2bn in the last few days from shorting renewable energy companies (Trump said he’d end offshore wind development on “day one”) and suspend subsidies under Biden’s flagship Inflation Reduction Act. The pharmaceutical sector has also been expressing alarm at the potential appointment into a senior healthcare position of vaccine-denier Robert F Kennedy Jr, who could well install fellow deniers into top federal roles. Putin says Trump’s Ukraine proposals merit attention (Financial Times, Polina Ivanova) shows that Putin congratulated Trump yesterday on his win and said that he would be open for a chat re ending the Ukraine war, to which Trump responded on NBC shortly afterwards “I think we’ll speak”. Asia will get rough end of the Trump trade (Financial Times, Lex) suggests that although Asian markets took Trump’s victory pretty much in their stride, automotive manufacturers with more EV exposure took a beating (Trump is committed to ending the mandate to sell EVs), EV battery manufacturers Samsung SDI and LG Energy Solution saw their share prices fall given their exposure to the US market via Japanese and Korean carmakers. Meanwhile, Elon Musk might be Wall Street’s great white whale (Financial Times, Lex) suggests that although a huge M&A/IPO bonanza is widely expected to be in prospect in the wake of Trump’s win, the potential fee amount that could be earned by whoever gets to be tight with Elon Musk might be particularly impressive because his own corporate empire (xAI, SpaceX and Tesla) is likely to be a fee machine given the high-growth areas that they are in. Goldman Sachs used to be Musk’s go-to but there was a bit of a grumble there when Goldman was defending Twitter in the whole takeover debacle – and it did such a good job that it effectively forced Musk to buy at the price he promised. If he’s feeling vindictive, then he could always use Morgan Stanley – and Musk might be more positively disposed to them because they arranged $13bn of loans for the takeover. It’s going to be a cutthroat race for fees – and Goldman Sachs is particularly adept in the fight…

Back in the UK, What Trump means for your money (Financial Times, Emma Dunkley) points out that the dollar has been strengthening since Trump’s win, and if it continues to rise (because his policies are seen to be inflationary, which means interest rate cuts could slow down or even reverse, making the US a more attractive place to park money) then buying US goods and going there on holiday will cost more for US consumers. Oil is priced in dollars, so a stronger dollar means that the effective price of petrol will rise, which could have a knock-on effect on headline inflation. On the other hand, a stronger dollar would be beneficial to FTSE100 companies, as

many of them generate their revenues in dollars (e.g. equipment rental company Ashtead and InterContinental Hotels Group) while companies in the financials and defence sectors should benefit from increased possibility of making money on loans in the US market and higher defence spending respectively. The “Magnificent Seven” US tech stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – are also expected to benefit from Trump’s potential “light touch” approach to regulation, which could benefit UK tech companies such as Sage.

More growth, inflation and uncertainty: the BoE’s Budget verdict (Financial Times, Delphine Strauss and Sam Fleming) highlights the Bank’s decision to cut interest rates yesterday from 5% to 4.75%, but it also points out its assessment of the potential impact of last week’s Budget – that there will be higher growth and higher prices in the short term but more uncertainty beyond that. Right now, Big business lines up to warn on jobs (The Times, Katie Prescott and Jessica Newman) shows that businesses are now managing expectations in the wake of last week’s Budget – and are particularly aggrieved about the impact of employers’ National Insurance Contributions and the lowering of the NIC threshold where it becomes payable. Companies including BT, Sainsbury’s, Howden Joinery and Persimmon have all painted a downbeat picture about the impact while industry group UK Hospitality reckons that the annual hit to its sector will be in the region of £3.4bn, with £1bn of that being thanks to the NIC increase alone! * SO WHAT? * It seems to me that Trump’s victory has somewhat overshadowed Reeves’s first Budget but corporates are still counting the cost of her policies – they DEFINITELY won’t be forgetting what she said. The dust is still settling on the upheavals of the last week and until we know more about how Trump is going to flesh out his policies, there will be no end of theorising – which will probably lead to more market volatility. You do wonder, though, what a quick end to the Ukraine and Middle East wars would do to the world economy – you would have thought that this could actually be a massive boost because I get the feeling that markets have been just pricing in a long old drudge with no end in sight. Depending on the detail of any agreements, supply chains could suddenly be freed up, meaning that commodities prices and food prices could fall in a meaningful way – which could take the edge off any inflationary pressures that Trump policies are expected to make.

Government explores privately-funded Birmingham-Manchester rail link (Financial Times, Jennifer Williams) shows that there are efforts going on to bring the northern leg of HS2 back from the dead as transport secretary Louise Haigh said that it could go ahead with private sector funding. She’s working together with the mayors of Greater Manchester and the West Midlands. * SO WHAT? * I think that this sounds like a pipe dream – especially as Reeves has just hit companies with the higher costs of last week’s Budget. If I was a business, I would DEFINITELY NOT give ANY money to this without a government-backed, cast-iron guarantee that I wasn’t going to lose any money because it seems that cost overruns on big projects like this are inevitable (HS2 is a prime example of this!). Of course the majors are going to push this (and I don’t blame them), but I just can’t see many private sector companies wanting to touch this with a 10-foot bargepole – and certainly right now. Maybe they will be more receptive next year when the policies of new regimes on both sides of the Atlantic have time to bed in.

In oil news, Shares in North Sea giant fall 60pc after Deloitte called in for investigation (Daily Telegraph, Jonathan Leake) highlights a nightmare situation for one of the North Sea’s biggest energy companies, Wood Group, after an accounting review, led by Deloitte, uncovered all sorts of nasties. This review was originally prompted by the August announcement of a massive £761m loss in the half year results. Other contracts on its books are now under review, but many investors aren’t giving the company the benefit of the doubt and have headed to the exits already. This is not looking good at all…

Bentley delays its switch to electric-only cars from 2030 to 2035 (The Guardian, Jasper Jolly) provides us with yet more evidence about the demise of EVs as the posh car company says that it will keep selling fossil fuel cars until 2035 – a major push-back versus its originally-stated plan. Toyota, Volvo and Ford have all delayed electric models in response to ongoing sluggish demand – and I’m sure that plenty more will do so as well.

Then in Nissan to cut 9,000 jobs globally after sinking to a loss (The Guardian, Jasper Jolly) we see that production capacity at the Japanese carmaker is going to be cut in dramatic fashion by 20% following a loss in the three months to the end of September. It is, however, thought that the UK factory in Sunderland is likely to remain untouched. It said that higher costs and overly-high inventory levels are hitting it badly. It was also downbeat about the prospects for hybrids in the US.

The automotive gloom continues in Stellantis Plans to Cut 1,100 Jobs at U.S. Jeep Plant (Wall Street Journal, Adam Whittaker) as the carmaker aims to do something to cut high inventory levels that are dragging on performance. Its plant in Toledo, Ohio, will move from a two-shift pattern to a one-shift pattern. * SO WHAT? * Big inventories of unsold cars, sluggish demand for EVs and the prospect of EV death in the US thanks to Trump are hugely problematic. Adding in the consequent likely flooding of European markets with cheap (and often, better) EVs and the now stretched-out costs of retooling manufacturing facilities to make these cars you end up with a sticky mass of unpleasantness for the entire automotive industry. I suspect that there will be more job losses, more joint ventures to spread the costs and more decisions made about which regions efforts will be concentrated on. Ouch.

In real estate developments, UK house prices reach new record high, says Halifax (The Times, Tom Howard) cites the latest research by Halifax which shows that house prices in the UK are now higher than ever, beating the previous record of summer 2022. Although the rate of price rises has slowed down over the summer, they are still rising! The UK’s average house price is now £293,999. * SO WHAT? * It is worth noting that Halifax measures house prices differently to Nationwide, which is why the latter still says that prices are a touch below the 2022 peak. Given that this has happened while interest rates have been pretty high, it just goes to show the strength of underlying demand. Halifax expects house prices to continue to rise from here. I would add that I think that the market is going to go bananas until next April when the stamp duty threshold goes back up to where it was before, but that is of course just a personal opinion!

Does the Bank of England’s interest rate cut mean lower mortgages? (The Guardian, Rupert Jones) is worth mentioning as it covers some important points. Mortgages won’t get cheaper for the majority of owners because 82% of mortgage holders are on a fixed rate. It is, however, good news for those who have mortgages that are coming up for renewal. Also, for those on a tracker

mortgage, mortgage payments will come down. Fixed rate deals have been coming down recently but Trump’s victory adds a bit of uncertainty into the mix, so the downward trend may slow down or pause for a bit.

Meanwhile, in commercial property news, Hammerson buys back Westquay at half the price (The Times, Tom Howard) shows that the listed landlord has just bought back a 50% stake in the Westquay shopping centre in Southampton for less than half what it sold it for in 2007. GIC, the Singaporean sovereign wealth fund, bought a 50% share for £299m in 2007 but Hammerson just bought it back for £135m, giving it full ownership. * SO WHAT? * This highlights just how desperate things have become in retail property over the last decade or so. Another example of this is Land Securities buying an additional stake in Bluewater for a third of what it was estimated to be worth in 2015. Shopping centre rents have cratered in recent years, mainly because a lot of formerly big tenants (e.g. BHS and Topshop) have gone bust. Hammerson reckons that rents are about a third short of their 2017 peak but there are signs that this has now bottomed out.

In a quick scoot around some of today’s other interesting stories, Airbnb Posts Higher Third-Quarter Revenue as Travel Demand Accelerates (Wall Street Journal, Connor Hart) shows that the short-term rental company rode a wave of strong demand in Q3 thanks to improving North American, Asia-Pacific and Latam demand. Improving demand is continuing so far for Q4.

Goldman Sachs names biggest partner class since 2010 (Financial Times, Joshua Franklin) highlights the announcement of a particularly long list of partners at the investment bank. The announcement only occurs once every two years, so this is a big deal. * SO WHAT? * I think that this is another sign of the belief that there’s going to be an explosion of corporate deals going forward. They need to tie-in their superstars in order to ensure that they don’t leak out and go elsewhere! Fewer than 1% of the bank’s employees become partners and becoming one guarantees you a salary of at least $1m plus bonus and other perks (and by the way, that is just the LEAST of it! Remuneration will be waaaaay higher than this). Work-life balance?? I think not!

Back in the UK, Rolls-Royce closes down electric flying taxi operations (The Times, Robert Lea) shows that Rolls-Royce has officially ditched its ambitions in the electric flying taxi business

(thank God!) and it has been shut down after failing to find a buyer. Other than that, the company’s Q3 trading update yesterday showed that it was still confident of hitting full year targets.

Sainsbury’s boosted by return to the office but warns of price rises (The Guardian, Jack Simpson) highlighted a solid half year performance but its CEO warned about the likely impact of Reeves’s Budget last week (something I mentioned above). It’s benefiting from the RTO trend as more people are now reverting to the weekly shop.

Recruitment suffered in run-up to the budget (The Times, Tom Howard) cites data from KPMG and REC which shows that the lead-up to the Budget saw the biggest drop in new hiring since March as job vacancies eased for the 12th consecutive month. It’s hardly surprising – and given what’s happened it’s probably just as well from the employers’ point of view! I would have thought that we’ll be seeing more recruitment of temps/contractors, if companies need more staff.

You do wonder what the neighbours must think, but have a look at this amazing trampoline stunt! I know I’ve published the odd one of these in the past but this is pretty impressive!