Friday 28/07/23

1. In MACRO & COMMODITIES NEWS, US economic growth picks up, the ECB raises interest rates, Shell and Total see profits fall, British Gas sees profits boom and Anglo American is hit by a sluggish China
2. In TMT NEWS, the EU launches an antitrust inquiry into Microsoft, Intel benefits from a PC rebound, Netflix rejigs and ITV warns of an ad recession
3. In CONSUMER GOODS, RETAIL & LEISURE NEWS, Kering buys into Valentino, L’Oréal’s on the lookout, Nestle indicates price rise slowdown, the BRC warns on shop closures, Frasers booms and McDonald’s satisfies
4. In MISCELLANEOUS NEWS, more UK lenders cut mortgage rates, Foxtons benefits from higher rents and Canary Wharf sees another big company leave while VW cuts forecasts, Bentley sputters, Ford raises forecasts and Lookers’ buyer increases its offer
5. AND FINALLY, I bring you Gordon Ramsay’s massive steak sandwich…

So the US grows, the ECB hikes rates, Shell and Total’s profits shrink, BG’s grow and Anglo American suffers from sluggish China demand…

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:

US economic growth accelerates to 2.4% in second quarter (Financial Times, Nicholas Megaw) highlights better-than-expected economic growth for the US in Q2 at 2.4% building on the 2% growth of Q1 and well above market expectations of 1.8%. Although consumer spending lost momentum after a strong start, it was more than offset by solid performance from business

investment in inventories and fixed assets. * SO WHAT? * This news came just one day after the Fed lifted its interest rate to its highest level for 22 years and could be another sign that the interest rate hike “medicine” is actually working – and that the peak is in sight!

Then in ECB raises interest rates back to record high (Financial Times, Martin Arnold and George Steer) we see that the ECB raised interest rates by 0.25% to 3.75%, which is its highest since 2001. Pretty much everyone was expecting this and it is the ECB’s ninth hike in a row. Although at the moment it sounds like more hikes are likely, it sounds like the ECB is leaving the door open for a pause.

In oil and gas news, Shell and Total profits shrink as oil and gas prices fall (Financial Times, Tom Wilson) shows that profits at both Shell and TotalEnergies fell sharply in Q2 thanks to lower oil and gas prices as their 18 month winning-streak appears to be at an end. Meanwhile, British Gas reports record £969m profit after price cap increase (The Guardian, Jillian Ambrose) highlights the company’s best-ever H1 profits – an increase of almost 900% from H1 in 2022! BG wasn’t the only one to benefit from changes to the energy price cap – EDF Energy and Scottish Power also did. Clearly this isn’t a good look and it will undoubtedly be something that everyone will pounce on if utility bills continue to stay at elevated levels.

Then in Mining giant hit by China’s slow rate of recovery (The Times, Emily Gosden) we see that Anglo American has also been adversely affected by sluggish demand from China, echoing what rival Rio Tinto said. It said that net profits for the six months to June dropped by a whopping 66% which was blamed on falling commodity prices and slow demand from China, which is the world’s biggest biggest consumer of most commodities. The road to recovery for China is currently unclear.

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!

The EU looks at Teams, Intel benefits from a PC rebound but ITV warns of an ad drought…

In tech news, EU opens antitrust inquiry into Microsoft’s Teams software (The Guardian, Lisa O’Carroll) shows that the EU is now looking into the bundling of Teams in with its Office 365 and Microsoft 365 packages and whether this constitutes anti-competitive behaviour. This will be the first time that the EU has launched an antitrust investigation into Microsoft since 2008 and follows complaints made by Slack Technologies in July 2020 to the effect that it “illegally tied Teams to its dominant productivity suites”. No doubt Zoom (and Hopin!) will also be pleased that these concerns are being looked into. * SO WHAT? * It’s about blimmin time!!! I’m just an outsider but it looks like a slam-dunk to me as bundling this all in together looks to be highly unfair IMO. I reckon Microsoft will drag this out for as long as it can and then if it has to unbundle it, it will. However, the longer this takes the more companies are going to get embedded with Teams and be reluctant to go to any rivals if the investigation finds that it is being illegally bundled.

There’s good news in Intel Returns to Profit as PC Rebound Lifts Chip Demand (Wall Street Journal, Asa Fitch) as a rebound in the PC market has pushed it back into the black after two consecutive quarters of record losses! The company also made positive noises on its forecasts thanks to the AI boom which was probably made all the sweeter given that analysts were actually expecting another loss! * SO WHAT? * It seems that there have been signs that PC demand is starting to recover as PC shipment declines are getting less marked than they were. During lockdown, PC demand went through the roof (and it was made all the more acute thanks to

supply chain problems) but since then activity has tailed off somewhat. AI chip demand is likely to be a driver although it faces competition for different types of chips from the likes of Nvidia and AMD.

In media news, Netflix Reworks Microsoft Pact, Lowers Ad Prices in Bid for Growth (Wall Street Journal, Suzanne Vranica, Jessica Toonkel and Patience Haggin) shows that the streaming giant is currently revisiting its advertising partnership with Microsoft one year into the current deal and will be cutting ad prices to give the new ad-supported subscription business a boost. As part of the original deal, Microsoft has been providing tech for this new tier and selling ads exclusively on behalf of Netflix. Recently, Netflix has been cutting prices from $45-$55 per 1,000 viewers to $39-$45 per 1,000 and it is thought that this, along with ditching the exclusivity and opening the field up to other advertisers, could jolly things along a bit. This sounds reasonable, but I guess we’ll just have to wait to see how this pans out.

Talking of ads, ITV warns it is in ‘worst ad recession since financial crisis’ (The Guardian, Joe Middleton) shows that the broadcaster has seen its biggest advertising downturn since the 2008 financial crisis, saying that earnings have dropped by 52% in the first half of the year thanks to a tough market and the money it’s had to pour into its ITVX online streaming service. It is interesting to note, though, that although ads has been tricky, there has been a lot of interest in the sponsorship of programmes. * SO WHAT? * This isn’t great to hear as advertising is usually a reasonable leading economic indicator – but the company remains cautiously positive going into the end of the year, so things could be worse!

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!

Kering buys into Valentino, L’Oreal searches for targets, Nestle signals a slowdown in price rises, the BRC makes high street warnings, Frasers booms and McDonald’s serves up a tasty treat…

In Kering buys 30% stake in Valentino from Qatari fund (Financial Times, Adrienne Klasa) we see that luxury goods company Kering, owner of Gucci and other brands, has agreed to purchase a 30% chunk of Valentino for €1.7bn in cash in a “strategic” deal that could give it the option of taking full control by 2028. This is part of a partnership between Kering and Mayhoola (the current Qatari owner of Valentino) and may lead to Mayhoola becoming a shareholder in Kering. * SO WHAT? * This makes strategic sense in that Kering has continued to lag the performance of rivals LVMH and Hermès and this looks like it is at least doing something to address the lacklustre performance. Remember last month Kering also bought Creed, so it seems that activity is gathering momentum at the moment! Given that Kering also reported first half results for 2023 yesterday with a disappointing performance from Gucci (which accounts for around 50% of Kering’s total revenues!), a refresh is most definitely needed!

Then in L’Oreal on lookout for further acquisitions after Aesop, says chief (Financial Times, Adrienne Klass) we see that the French cosmetics giant is still in shopping mode as its appetite for deals continues even after its recent $2.5bn acquisition of posh skincare company Aesop. It remains keen on finding brands that have a bit of a track record and that still have global growth potential. In terms of performance, the company H1 sales were up, largely thanks to demand for make-up (return to the office and social lives I guess, after lockdown!). Growth in Europe and the US looks pretty healthy but although China’s recovering, sales are still below pre-pandemic levels. * SO WHAT? * It is interesting to note, here, that although we have been seeing signs of a slowdown in the “luxury” sector from the likes of LVMH and Richemont, beauty product demand doesn’t slow down so quickly because it is at a lower price point. Things are also being helped by input price rises slowing down.

Elsewhere in consumer goods, Nestlé says price rises will ease this year as it upgrades sales forecasts (Financial Times, Madeleine Speed) shows that the company reckons price rises will

ease off in the second half of the year as it raised its sales forecasts despite seeing a fall in sales volumes in the first half. * SO WHAT? * Rivals Reckitt Benckiser and Unilever have also experienced much lower volumes – particularly in Europe – but they are also making positive noises about the passing of “peak inflation”.

In retail news, UK loses 23 shops a week to Covid and high interest rates (Daily Telegraph, Riya Makwana) cites BRC research which shows that around 6,000 retail stores have closed on the high streets since 2018, with rising costs (particularly sky-high business rates) and the pandemic being to blame. Business rates are based on shop rental values and paid by the tenants themselves rather than the property owners and look set to rise by a whopping 30% in April next year – so the BRC is clearly gunning for a reduction or some kind of reprieve. It also pointed out that vacancy rates have gone up from 11.1% in 2018 to 13.9% in Q2 this year, which is down from the peak of 14.5% in 2021. Tricky times.

On the other hand, Frasers profit surges 40% as younger shoppers boost Sports Direct owner (Financial Times, Laura Onita) highlights Frasers Group’s success which was powered by Gen Z and Alpha as they save up to buy products that help them stay “socially relevant”. The company also believes that its profits will rise between 5% and 15% this financial year and relations with big brands like Nike continue to improve. That said, House of Fraser owner could close more big shops as department store model ‘broken’ (The Guardian, Sarah Butler) shows that department stores remain a headache for Frasers Group and could see more closures. The store portfolio has gone from 59 outlets to 31 since Frasers Group (then called Sports Direct) bought it in August 2018. The main problem is that they are too big! * SO WHAT? * This is an impressive performance but they are not out of the woods yet as inflation is still turning the screws on consumers and Frasers has quite tight margins, so there is less wiggle room to pass on rising input costs.

Then in leisure, McDonald’s serves up tasty profits to satisfy Wall Street (The Times, Callum Jones) we see that McProfits rose faster than expected in the final quarter thanks to increased prices and more customers! Performance outside the US was particularly strong in Germany and the UK. I guess the key thing now is what they do next with prices as ingredients costs calm down in the second half of the year.

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!

There are more mortgage cuts, Foxtons benefits from higher rents and Canary Wharf looks set to lose another big tenant while VW lowers expectations, Bentley sees slowing momentum, Ford motors and Lookers gets a higher offer…

In a quick scoot around some of today’s other interesting stories, Three of the UK’s largest lenders cut mortgage rates (Financial Times, Siddharth Venkataramakrishnan) highlights mortgage rate cuts from Nationwide, Barclays and TSB after HSBC “broke the seal” earlier this week. HSBC’s move was itself prompted by last week’s better-than-expected inflation figure. Other lenders also lowered their rates in a move that will no doubt give relief to those who are soon-to-remortgage and house-hunters alike. Meanwhile, Foxton’s profits climb on higher rents as buyers retreat (Financial Times, Akila Quinio) shows that London-based estate agency Foxtons has been profiting from a very tight rental market. This has actually more than compensated for the slowdown in house sales in the first half of the year. Then on the office property side of things, Canary Wharf woes deepen as ratings agency plots to leave (Daily Telegraph, Riya Makwana) shows that ratings agency Moody’s is the latest company to announce that it will probably leave the area to cut costs. It has appointed a property broker to advise on options for new office space in London. It wants to cut its footprint by a third as it adapts to new working practices. * SO WHAT? * There’s been a lot of panic talk recently, particularly as high profile tenant HSBC announced recently that it would be moving from Canary Wharf to the City. When you include other tenants like Clifford Chance, Credit Suisse etc. drawing up plans to leave the area, some people are talking about a mass exodus that will be increasingly difficult to stem. It’s not a 100% given that Moody’s will leave, but it is clearly having a serious look at its options.

In car-related news, VW cuts global delivery forecast after sales fall in China (Financial Times, Patricia Nilsson) shows that sales weakness in its biggest market has prompted the downgrade despite strong performances in Europe and the US. No wonder it’s keen to do deals with local makers! Bentley car boom may stall as UK and China sales slip (Daily Telegraph, Howard Mustoe) shows that even the luxury end of the market is showing signs of weakness after a long period of success. Orders in the first half of the year slowed down and the company’s outlook for the second half is quite cautious. That said, it was interesting to note that Mercedes-Benz said it was seeing rising demand for its top-end cars – there was a 39% jump in sales of its Maybach limousines, for instance.

At the more “normal” end of things, Ford Raises Profit Forecast Despite Steeper EV losses (Wall Street Journal, Nora Eckert) shows that the blue oval delivered decent Q2 profits and did well enough to raise its forecasts for the full year. On the other hand, it did warn of sharper-than-expected losses in its EV business which has been dented by intense price competition. The performance of its traditional combustion-engine car business and trucks/commercial vehicles division have, however, offset the EV weakness – for now.

Then in Lookers investors eye bigger cash bid (The Times, Dominic Walsh) we see that Global Auto Holdings – which is linked to the Canadian car dealership Alpha Auto Group – put in a higher 130p per share cash offer to buy Lookers. Its initial 120p offer, which was actually recommended by the board, was rejected by Constellation Automotive (which owns a 20% slice of Lookers) last week. We don’t know yet its reaction to the higher offer. The drama continues…

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…

Gordon Ramsay’s steak sandwich looks great but I think you’d have to unhook your jaw in order to eat it!