Friday 26/07/19

  1. In MACRO NEWS, the ECB announces stimulus, Germany weakens, Spain’s PM loses the vote and South Korea’s economy rebounds
  2. In TECH NEWS, Amazon’s winning streak ends, Google’s continues and Apple buys into smartphone modems
  3. In HIGH STREET NEWS, the UK high street hits new lows and Mothercare mulls selling its UK business but Starbucks and Sephora show strong performances
  4. In CIGARETTE & ALCOHOL NEWS, Imperial buys into cannabis and Diageo thinks about it
  5. In OTHER NEWS, I bring you flaming noodles…



So the ECB aims to stimulate, Germany suffers, Spain’s vote goes against PM Sanchez and the South Korean economy stages a rebound…

It has been very well flagged but ECB signals it will move to boost growth amid fears of low inflation (The Guardian, Larry Elliott) shows that it will go the same way as the Federal Reserve and try to boost global growth by implementing stimulus measures to stave off deflation – including the resumption of quantitative easing. * SO WHAT? * The ECB is clearly trying to restore confidence in the Eurozone’s flagging economy which has been hit hard by slowing exports. It said that the current inflation rate of 1.3% was far short of its usual target of 2% necessitating “the need for a highly accommodative stance of monetary policy for a prolonged period of time”. The IMF supported its decision.

ECB on red alert as Germany teeters on the brink (Daily Telegraph, A. Evans-Pritchard) highlights the weakness of the Eurozone’s biggest economy as the closely-followed IFO Institute’s business confidence survey showed that over 80% of Germany’s factories are in contraction across the board – this isn’t just in the automotive sector phenomenon – as the ongoing US-China trade conflict takes its toll. IFO Institute president Clemens Fuest observed that “All the problems are coming together. It’s China, it’s increasing protectionism across the board, it’s distruption to global supply chains” and he went on to say that he disagreed with the ECB’s stance regarding stimulus because this could prompt Trump into taking an even more

entrenched stance on European exports deeming any stimulus as giving the bloc unfair competitive advantage via a weakened currency.

Spain’s Pedro Sanchez fails to form government as talks collapse (Financial Times, Ian Mount) highlights big problems in Spain as caretaker PM Pedro Sanchez failed to get MPs’ approval to form a new government for the second time in three days because he just couldn’t mange to form a coalition with the far-left Podemos party. * SO WHAT? * Sanchez’s lack of progress takes Spain a step closer to another election – his centre-left PSOE socialists only won the last one in April! Mind you, he still has two months to get something agreed and appease Podemos complaints that they were only being offered “decorative” government roles. Sanchez became PM of a minority government last year after kicking out conservative Mariano Rajoy in a parliamentary confidence vote.

Although I mentioned weakness in South Korea’s economy in yesterday’s Watson’s Daily (the Bank of Korea last week cut its GDP growth forecasts – for the first time in three years – from 2.5% to 2.2% with both exports and imports falling), South Korean economy rebounds on heavy government spending (Financial Times, Song Jung-a) shows that the economy actually grew at its fastest rate for almost two years in the second quarter as major government spending mitigated the slowdown in China, worsening trade relations with Japan and, of course, the US-China trade war. * SO WHAT? * GDP grew by 2.1% compared with the second quarter of last year, but pressures may well increase as Japan makes trade harder and the other factors continue to drag on. Interestingly, the data showed that the economy would have contracted had it not been for government spending.



Amazon wobbles, Google triumphs and Apple invests $1bn…

Amazon’s streak of record profit ends (Wall Street Journal, Dana Mattioli) shows that even the mighty have to pause for breath every now and again as its second quarter profits were hit by higher shipping costs (the company invested a lot in making one-day delivery the standard for its Prime members), a loss in momentum for its cloud computing business (as competition in this space increases – although it’s still a good growth rate!) and problems in overseas businesses in India (where the government favours domestic players) and Europe (where it’s currently facing an antitrust investigation by the EU). On the plus side, Amazon’s sales growth jumped after contracting for four straight quarters and revenues increased by 20% – above consensus estimates.

On the other hand, Google posts strong profits as hazards mount (Wall Street Journal, Rob Copeland) shows that Google’s parent company, Alphabet, posted revenues up by 19% in the quarter as Google continues to be dominant in the internet search space. The company is expected to continue to put more ads into Maps and YouTube and it said that its cloud business was on track (although it didn’t say whether it was profitable). Alphabet is the worst performing “Big Tech” stock this year, but the share price bumped up by 9% on this news although it, like its peers, faces potential headwinds in the form of a Justice Department antitrust investigation

Apple takes $1bn bite of Intel’s smartphone modem business (Daily Telegraph, James Titcomb) signals a chunky investment by Apple as it buys Intel’s smartphone modem business, taking on 2,200 Intel employees and the thousands of patents on wireless technology. * SO WHAT? * Apple is trying to reduce its exposure to external suppliers (just ask Qualcomm) and so this deal gives the company a bit more control over the tech that goes into its phones.



The UK high street hits new lows Mothercare looks to sell its UK business but then Starbucks and Sephora buck the gloomy trend…

High street decline is worst for eight years (The Times, Philip Aldrick) is the decidedly unsunny conclusion of the latest CBI survey which found that retail sales fell for the third month in a row – the first time this has happened since 2011. Department stores, apparel retailers were among those who were hit hard and the CBI’s chief economist Rain Newton-Smith observed that “It is still hugely concerning that sales have fallen for the longest period in almost eight years”. * SO WHAT? * This is just more evidence of the continued weakness of the high street and shows the worrying fact that although disposable household incomes are being boosted by wages outpacing inflation, the high street isn’t currently reaping the benefits. As I keep saying, I think that all retailers REALLY need to concentrate on enhancing the shopping experience they offer to their customers to get them over the threshold. If they can balance this will a compelling online offering, then all the better. If they just stick with what they’ve always done, I think they are toast.

In Mothercare ‘poised to announce sale’ of ailing UK business (Daily Telegraph LaToya Harding) we see that the ailing baby/maternity goods retailer is likely to sell its UK business to concentrate on its global brand and online business after it negotiated more support from lenders. This move comes not that long after the company entered a company voluntary arrangement (CVA) last year. * SO WHAT? * Whenever people mention “CVA”, relief tends to ensue – but we are seeing an increasing trend these days of companies failing despite entering into a CVA because they can’t do enough to alleviate the pressures that got

them into the position in the first place. Mothercare is just the latest example and it is sad to see yet another well-known retailer bite the dust.

On a more positive note, Starbucks boosts sales with help from new drinks, store upgrades (Wall Street Journal, Heather Haddon) shows that sales were up in its key US and China markets  – and that global same-store sales growth of 6% was its strongest growth rate in three years. The company’s share price has risen by a chunky 40% this year – outperforming both the S&P500 and larger US restaurant chains. * SO WHAT? * Starbucks manages to keep its head above water in an ever-competitive market and continues to invest in its China business (where it is facing increasing pressure from the ridiculously fast-growing domestic rival Luckin Coffee) and systems. TBH, I think that’s all it can do – so it just needs to keep going!

Then in For Sephora, the store is core to its beauty (Financial Times, Harriet Agnew) we see that investment in the company’s store portfolio continues to pay dividends – its sales have quadrupled in the last eight years on the back of a strong beauty market. I agree with chief exec Chris de Lapuente’s observation that “A lot of people are scared of the retail apocalypse so they’re not investing in stores, and that becomes a self-fulfilling prophecy…we’re investing in our stores, taking our top 100 stores in the world and renovating them to the best possible standard”. He then went on to say that “Experiential retail is crucial to our success. Sephora is a place where people come for advice, they come to listen. We teach, inspire and play…you’re not going to get this online. Online you can do your research…here you can come and experiment”. * SO WHAT? * I am in full agreement with this approach and I guess that the hard thing now is for Sephora to keep this momentum going! However, against a backdrop of a booming beauty industry and a line-up of several exclusive brands (including Rihanna’s “Fenty”, among others) they stand a good chance of doing so – especially as they are targeting big opportunities in Asia.



Imperial Brands invests in cannabis and Diageo eyes it with interest…

Imperial smokes out growth with investment in cannabis (Daily Telegraph, Oliver Gill) shows that the tobacco company behind Lambert & Butler and Golden Virginia (among others) has decided to pay £75m for a 20% stake in Canada’s Auxly Cannabis Group as part of its plans to diversify its portfolio and invest in new products. Imperial already has a stake in Oxford Cannabinoid Technologies, which develops “cannabinoid-based compounds and therapies”, but Auxly is focused on the development of “derivative” cannabis products such as edibles, vaping products and lotions. * SO WHAT? * This sounds like a

really interesting area of potential growth. I think that there is a lot of scepticism in the market about cannabis products, but the fact is that where cannabis has been legalised, demand for related products has sky-rocketed. This is an area that is well worth watching.

Diageo keeps an eye on cannabis as gin and tequila sales soar (The Guardian, Rob Davies) highlights a decent performance by the company as its pretax profits increased by 12% on higher sales. Gin and tequila were particularly strong and a whisky tie-up with Game of Thrones (“White Walker” – geddit??) also helped to boost scotch. The company is clearly conscious that its rivals, such as Constellation Brands – are starting to invest chunky sums into cannabis and have admitted that they are monitoring the situation as chief exec Ivan Menezes said that “We’re looking into the sector, it’s nascent and we just want to understand the consumer behaviour”.



And finally, in other news…

I thought I’d bring your attention to some rather dramatic noodles in Kyoto’s awesome fire ramen: a one-of-a-kind dining experience our reporter Mai just tried (SoraNews24, Casey Baseel This looks superb! Maybe it needs a side of flaming Sambuca – just watch out for your eyebrows…

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Some of today’s market, commodity & currency moves (as at 0816hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq**DAX *CAC-40 *Nikkei **Shanghai **
7,489 (-0.17%)27,141 (-0.47%)3,004 (-0.53%)8,23912,362 (-1.28%)5,578 (-0.50%)21,658 (-0.45%)2,946 (+0.29%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)