Friday 12/10/18

1. In MACROECONOMIC AND MARKETS NEWS, Turkey looks like it’ll release the pastor and markets take a bath
2. In NEWS ON CARS, China sales continue to slow and BMW ups its commitment in the country
3. In RETAIL NEWS, Amazon ups its pay to long-timers, an online trainer and bag market is coming to you, Coast gets rescued, Patisserie Valerie continues to look tricky and WH Smith has mixed fortunes
4. In OTHER NEWS, I bring you a genius invention that we could do with over here. For more details, read on…

So Turkey/US relations might be about to get better and markets continue to plunge…

You may recall that Turkey has been having a rather rough time of things recently as the country’s economic woes have been exacerbated by Trump imposing sanctions in protest against an American pastor being held in the country on charges of espionage. Well Turkey is expected to release American pastor on Friday (Wall Street Journal, Alan Cullison, Peter Nicholas and David Gauthier-Villars) shows that this deadlock may be about to end as a release looks likely today after a court hearing. North Carolina pastor Andrew Brunson has been held since 2016, but now it looks like he may be freed – although deals have fallen through at the last minute in the past. * SO WHAT? * Basically, Turkey could do with some allies right now as it doesn’t have that much support in the region and releasing Brunson could bring Trump back onside. It would also be a nice little PR boost for Trump in the run-up to the midterm elections to say that he had managed to solve the Brunson dispute. In addition to this I would have thought that, if this goes ahead and sanctions are lifted, Turkey will see a relief rally and recovery in its currency. This would in turn reduce pressure to make any further interest rate increases, which is something that President Erdogan is keen to avoid. Some may argue that the resulting relief could lift other emerging markets as well but I’m inclined to think this is a Turkey-specific thing rather than a wider emerging markets thing. The problems remain for the latter regarding their dollar-denominated debt getting more expensive because of rising US interest rates, but I guess that a Brunson release isn’t going to do any harm!

FTSE 100 ends 10% off peak as global sell-off continues (The Guardian, Larry Elliott) highlights the continued market sell-off as investors continued to show concerns

over ongoing trade tensions, higher inflation and Donald Trump’s attempt to rein in the US central bank’s intentions to continue to raise interest rates. He told reporters yesterday that “we have interest rate going up at a clip that’s much faster than certainly a lot of people, including myself, would have anticipated. I think the Fed is out of control”. The Federal Reserve (aka “the Fed”) is expected to put rates up again in December and then put through up to four more increases in 2019. * SO WHAT? * The US economy is chugging along nicely, unemployment levels are super-low and wages are trending higher. This makes Trump look good. HOWEVER, the Federal Reserve is independent and it has the power to take some of the heat out of the economy by hiking rates, which will slow everything down – making Trump look not-so-good. Basically, I think it all boils down to this: if the central bank is more concerned about rising inflation than stock markets, interest rates WILL continue to rise at a decent pace, but if it has any concerns about the effects of its actions on the stock markets then perhaps the rises will be more gradual – at the moment, the base case is one rise this year and four more next. Anything less/slower than that will bolster current sentiment and the weakness we are seeing now could be viewed as a buying opportunity.

In the meantime, Tencent Music pauses IPO amid market turmoil (Wall Street Journal, Julie Steinberg and Maureen Farrell) shows how the current market sell-off is affecting sentiment in the IPO market. According to people close to the offering, it will be postponed until at least the middle of November in what would be one of the biggest IPOs in the US this year. It was due to start off its investor roadshow next week and start trading on October 22nd. * SO WHAT? * This is definitely the right course of action for the company right now – especially given the carnage not just in the US but in its own home market. For instance, Tencent Music’s parent company – Tencent Holdings – fell by 6.8% in Hong Kong yesterday alone – its tenth consecutive day of decline. The share price is now 34% down so far this year.

Car sales in China slow down and BMW increases its hold of its Chinese joint venture…

In Global car makers rattled by stalling China market (Financial Times, Tom Hancock) we see that Chinese car sales have fallen in both July and August versus the previous year and it looks likely that they will continue to fall in September. * SO WHAT? * Given that China is the largest and most profitable car market in the world, this is clearly a concern for car manufacturers who see the country as key to their profitability. Bernstein analyst Robin Zhu says that “the auto sector has been under huge pressure in recent weeks and months, with existing cyclical and structural concerns being joined by worries about tariffs and China. Few of these concerns are going away”.

Meanwhile, BMW to raise stake in China joint venture to 75% in €3.6bn deal (Financial Times, Tom Hancock and Alice Woodhouse) shows a concrete reaction to Beijing’s recent relaxation of its restrictions of foreign ownership in the automotive sector. The previous arrangement put in place a ceiling of 50% ownership by a foreign firm of a joint venture with a Chinese manufacturer, but the government said in April that it will lift this restriction by the end of this year for electric vehicles and by 2022 for other types of vehicle. * SO WHAT? * This will give BMW greater control over its JV with Brilliance Auto Group and boost margins. However, BMW/China: Brill seeker (Lex, Financial Times) believes that this is a costly investment in a market that has its own risks. On the positive side, China represents a great testing ground where car companies can sell low-emission vehicles to see what works and what doesn’t but on the other side, such an investment increases exposure to the whims of the Chinese government who still have a great deal of control over the supply chain and the actual sale of the cars.

In retailer news, Amazon ups its pay again for some workers, an online bags and trainers “market” comes to the UK, Coast gets rescued, Patisserie Valerie continues to look shaky and WH Smith has a bit of a mixed bag…

Further to recent criticism that its recently much-trumpeted wage rises for US and UK workers actually made them worse off because the reduction in benefits actually negated the increase, Amazon adds to pay rise of longtime workers to address backlash (Financial Times, Shannon Bond) shows that Amazon has decided to give an extra boost to workers who have been there the longest. Analysts don’t believe this wage increase is going to have too much impact on the overall financials of Amazon, though, as an increase in net incremental costs of between $400m and $1.9bn represents less than 1% of the company’s $235bn in revenues it is forecasted to achieve this year.

Online marketplace to resell trainers and handbags hits Europe (Financial Times, Andrew Edgecliffe-Johnson) heralds the arrival in Europe of Stock X, an online marketplace that sells things like Yeezy sneakers, Supreme streetwear and Louis Vuitton handbags, as it opens a west London facility that will authenticate products sold in the UK and 30 other European countries. StockX differs from sites like eBay because it offers “bid” and “ask” prices like a stock exchange with ticker symbols. When a transaction is

agreed, the seller sends the product to the StockX warehouse for viewing by authenticators, which has meant that the rate of fake goods it detects has dropped from 15% to 2%. The company touts itself as being an alternative retail model for brands and has expanded the product categories in which it trades. Sounds exciting, no?

Elsewhere, things continue to be tricky on the UK high street in Karen Millen snaps up Coast assets as it faces administration (Daily Telegraph, Ben Woods) as women’s clothing retailer Coast went into administration, with parts of the business being bought out by sister company Karen Millen. It’ll save some jobs and department store concessions, but 24 of its high street shops are still set to close. Mike Denny, from the administrator PwC, said that “this sale puts the ongoing business on a firmer financial footing. Karen Millen will be working with the existing management team to continue to grow and develop the new business”.

Patisserie Valerie faces closure without immediate cash injection (Daily Telegraph, Oliver Gill) shows that things aren’t getting any better for the bakery chain, keeping the future of its 2,500 staff and 206 shops in limbo. The saga continues as various advisers are called in…

Costs take gloss off profit rise at WH Smith (The Times, Deirdre Hipwell) shows that although underlying profits and the dividend rose at WH Smith, higher restructuring costs for its high street retail business sent the company’s share price down by over 11.5% in trading yesterday. Its travel division (shops in stations, airports etc) continues to power the company and accounts for over half of group sales and two thirds of profits.

And finally, in other news, I bring you an interesting new invention…

I thought that this might be particularly appropriate as it’s a Friday, but how about this as an invention of something you never knew you needed: Clever pizza box turns into a food tray so you can scoff slices in bed (The Mirror, Robyn Darbyshire https://tinyurl.com/ybfjhbd5). I wonder what great mind came up with that??