Monday 02/09/19

1. In MACRO NEWS, more US tariffs irk the Chinese and dent small US firms while Hong Kong braces itself for a general strike and in the UK, we look at the impact of a no-deal Brexit and the potential impact of a Labour share grab
2. In FINANCIALS NEWS, HSBC puts more pressure on mortgage lenders and Revolut plans a hiring spree
3. In INDIVIDUAL COMPANY NEWS, US shale companies continue to go bankrupt and Musk dabbles in insurance
4. In OTHER NEWS, I bring you a cafe that makes your eyes go funny…

So more tariffs come in, Hong Kong faces a general strike and, in the UK, we look at the potential impact of a no-deal Brexit and Labour’s proposal to raid companies of their shares…

China lashes out at US as Trump brings in new tariffs (The Times, Callum Jones) heralds the latest round of tariffs at the US slapped 15% duties on Chinese imports worth $125bn over the weekend. China counter-punched with 10% duties on around 1,700 American products including crude oil. This is the first of two waves of tariffs, the second of which is to be imposed by Washington on December 15th. Prior to yesterday’s move, Trump put duties on $250bn-worth of Chinese goods and China put duties on $110bn worth of US goods in retaliation. China’s state media responded to the latest round by saying “The United States should learn how to behave like a responsible global power and stop acting as a school bully”. Mind you, even though the US is taking the lead on all this, Tariff uncertainty weighs on small businesses (Wall Street Journal, Ruth Simon) shows that current actions are hurting “the little guys” by creating an atmosphere of uncertainty. A monthly survey for the Wall Street Journal showed that economic confidence among small firms fell in August has fallen to its lowest level since November 2012 as 40% of respondents expect the economy to worsen over the next 12 months versus 29% in July and 23% a year ago. Some are supportive of Trump’s actions and are willing to take short term pain for long term gain, but it seems that it is the uncertainty that is hurting the most as it makes planning very difficult.

Meanwhile, things are hotting up in Asia as Hong Kong braces for general strike after chaotic weekend (Financial Times, Sue-Lin Wong, Jamil Anderlini and Nicolle Liu) highlights today’s general strike following weeks of protests that are continuing to escalate despite Chinese efforts to quell them. Protests were originally sparked by a controversial extradition bill that would enable suspects to be tried in mainland China but have broadened to include demands for an independent inquiry into the police and universal suffrage. The strike will continue tomorrow and will undoubtedly cause a great deal of chaos as a previous strike last month crippled the city’s transportation network and resulted in hundreds of flight cancellations. The increasingly heavy-handed crackdown by authorities on protesters continues.

Back in the UK, Javid’s hard sell to City chiefs (Daily Telegraph, Jack Torrance) highlights chancellor Sajid Javid’s rather tricky task of trying to sell business chiefs the “opportunities” of a no-deal Brexit in a meeting scheduled for today with over a dozen bosses of companies such as Barclays, the London Stock Exchange and RBS. Talks are expected to focus on “Brexit opportunities and challenges”. Talking of no-deal, House prices could nosedive after no-deal Brexit – report (The

Guardian, Richard Partington) highlights a report by accountancy firm KPMG which concludes that a no-deal Brexit could result in house prices falling by up to 20%, hitting prices in London and Northern Ireland particularly hard. In the midst of all this, Boris Johnson vows to purge rebels who vote against no-deal Brexit (Financial Times, George Parker) shows a PM attempting to take control in the Brexit debate by taking extreme measures to ensure the threat of a no-deal won’t be scuppered. * SO WHAT? * Opponents of no-deal are teaming up across party lines currently in order to pass a law to stop BoJo executing a no-deal departure on October 31st, but the clock is ticking as they will have to get such legislation through this week. Having said that, Michael Gove, minister for no-deal planning, implied on TV yesterday that BoJo could actually ignore the law even if the legislation DID get through. The drama continues…

And talking of opposition, but moving away from Brexit for a moment, UK’s Labour would cost companies £300bn by shifting shares to staff (Financial Times, Jim Pickard) cites a report compiled by the Financial Times and Clifford Chance that shows companies and landlords alike stand to lose big time if Labour got into power in the event of an imminent general election. They would seize about £300bn of shares in 7,000 large companies and “give” them to workers, in what would be one of the biggest state raids on the private sector in a western democracy, and attack private landlords by imposing higher taxes on them and implementing a “right to buy” scheme for private tenants. The report looks at what could happen in the event of a Labour government and extrapolates what this would actually cost. * SO WHAT? * I guess that the most staggering conclusion is that Labour would basically seize £300bn versus the £4.8bn Tony Blair’s government expropriated from utilities companies in a “windfall tax”. The consequences would be catastrophic as there would be huge legal challenges from companies, shareholders and whole countries, such as China and the US, complaints from the WTO and then potential retaliation from other countries. Shadow chancellor John McDonnell says that more employee ownership is good for productivity and encouraged long-term thinking, saying that “It’s right that we all share in the benefits that investment process produces” but Matt Kilcoyne at the Adam Smith Institute observed that “Our largest investors are pension funds and they’ll see billions of pounds wiped off their books. So we’ll all see the value of our pensions fall. It’s the biggest raid of all our nest eggs in living memory”. As for landlords, McDonnell said that he wants to attack the buy-to-let market and make it easier for tenants to buy the homes they live in but suggested that they won’t have to pay market price when he said “You’d want to establish what is a reasonable price, you can establish that and then that becomes the right to buy”. Incredibly, he added that “You (the government) set the criteria. I don’t think it’s complicated”. WHAT???? Erm, surely what will happen is that the tenant will buy the house for less than it’s market value and then they’ll just sell it and pocket the difference. And who will decide market value?? Good old comrade McDonnell. Putin would be proud.

HSBC continues to cause ripples in the mortgage market and Revolut embarks on a hiring spree…

On the subject of housing and mortgages, HSBC to lend extra £35bn to UK home buyers (Financial Times, David Crow) shows that HSBC, which until now generates almost 80% of its profits in Asia, is pushing forth into the mortgage market by increasing its current £100bn exposure to UK mortgages to £135bn. It has traditionally lagged other mortgage lenders but has expanded its market share following the introduction of legislation in 2014 that forced British banks to separate their UK operations from their international and investment banking business. * SO WHAT? * Rivals are whinging that HSBC’s rapid expansion is distorting the mortgage market by providing cheap mortgages to grow their book making it harder for competitors to maintain or increase their own margins. Some players, such as Tesco Bank, have had to abandon the mortgage market as a result and there are concerns

that the squeezing out of other players could ultimately damage competition. Having said that, HSBC’s mortgage market share of 7% is still way lower than Lloyds on 20.4%, Nationwide on 13% and Santander UK on 11.2%. Customers are clearly benefiting from the availability of cheap mortgages in the meantime.

Then in Revolut plans hiring spree in customer service and compliance (Financial Times, Nicholas Megaw) we see that the banking disruptor has plans to increase its staff numbers by almost a third in a drive to strengthen in two key areas. Its customer base continues to expand rapidly and its £4m investment in Portugal with 400 new staff is intended to meet criticisms that it is having trouble coping with the influx. * SO WHAT? * This follows similar moves by rivals N26 and Monzo to make sure they meet new customer expectations and comes as it looks for backers in its next big investment round, expected by the end of this year. On another note, it seems that Portugal is becoming an increasingly popular FinTech hub because of its low costs, high quality of education and good standard of life. Companies such as Google, BNP Paribas and Euronext have all opened tech centre there in recent years. 

US shale companies continue to go bust and Elon Musk talks about insurance…

It’s interesting to see that, following on from last week’s news about BP selling out of its Alaskan interests to concentrate on shale, Oil and gas bankruptcies grow as investors lose appetite for shale (Wall Street Journal, Rebecca Elliott and Christopher M Matthews). So far, 26 oil and gas producers including Sanchez Energy and Halcon Resources have filed for bankruptcy this year as shale producers borrowed big in the last few years to up production and are having trouble refinancing debt that’s coming up for renewal as oil prices continue to hover at around $60 a barrel. This has meant that investing more money in shale has become a less compelling option for investors, leaving some of the operators high and dry. 28 producers went bankrupt in the whole of 2018, so you can see why concerns are increasing about the acceleration in bankruptcies this year. * SO WHAT? * It’s the smaller operators who have suffered the most thus far, but maybe this is where the majors such as BP can step in and buy

them up for decent prices and squeeze out better economies of scale.

Musk moves into insurance to cut premiums for Tesla owners (Financial Times, Robert Armstrong and Oliver Ralph) heralds the beginnings of Tesla becoming a bona fide motor insurer as the company decides to do something about the perception that its vehicles cost too much to insure. Currently, specialist insurer Markel underwrites Tesla’s auto insurance, but Tesla said that it is moving towards becoming an insurer in its own right and use its own balance sheet to underwrite car insurance. Musk argues that Tesla’s access to data captured by their cars will give his company an advantage in pricing over third party insurers as they use “anonymised fleet data” rather than driver-specific data. It hopes to slash insurance rates for its drivers by 20-30% as a result. * SO WHAT? * At first glance, this looks like it will be a nightmare given that insurance is an extremely complicated business to be in for anyone, let alone an electric car company! However, Tesla is in the unique position of knowing more about its drivers than any other insurer possibly could so will be in a much better position to judge the safety of its drivers. Still, it does sound like it’s taking an unnecessary risk here by wading into another complicated and highly competitive industry.

And finally, in other news…

I thought I’d bring you a very unusual cafe today in Tokyo’s amazing 2D Cafe looks like an illustration, but it’s an actual restaurant you can eat in! (SoraNews24, Casey Baseel https://tinyurl.com/yymoydhn). This really does make your eyes go funny!