Watson’s Weekly 01-07-2023

This is an amalgamation of the “best bits” of the daily weekday newsletter/blog woven together to form a concise and coherent view on the things that matter in the commercial and economic news of the week. 

THE COLOURED HIGHLIGHT REFERS TO THE EDITION WHERE THE STORY APPEARED IN WATSON’S DAILY. Clicking on the day will take you to the appropriate edition of Watson’s Daily.

This was the week of the Wagner drama, Thames Water nightmares and Twitter 2.0…

• IN GLOBAL MACRO NEWS – Central banks chiefs from the Fed, ECB and Bank of England all warned about higher-for-longer interest rates that will be needed to combat inflation.
• IN THE US – the latest data reflected surprise GDP growth despite rising interest rates. Does this mean that the Fed has managed to calm inflation without damaging the underlying economy?
• IN EUROPE – ECB chief Christine Lagarde hinted that there would be more interest rate rises to come, which prompted a strengthening in the euro versus the pound and dollar. Meanwhile, the latest Ifo survey showed that business sentiment in Germany had worsened for the second month in a row as China’s economy is going sideways and the US looks like it’s going to fall into recession. As if that wasn’t bad enough, Germany also saw a surprise rise in its inflation rate for June, which will no doubt put more pressure on the ECB to keep hiking rates.
• IN RUSSIA – Wagner’s leader threatened to march on Moscow, then withdrew after Prigozhin brokered a deal with Belarus. Putin accused the Wagner Group’s leaders of betraying Russia, some assets were seized and we saw the immediate economic impact in the form of higher wheat prices, the collapse of the rouble versus the dollar and a spiking of gas prices. Things may get worse as an already-tight labour market may get tighter if Russia starts to look for more recruits. Meanwhile, it raised fees for letting airlines fly over Russian airspace and was facilitated by oil traders Vitol and Gunvor who traded Russia’s refined oil.
• IN THE UK – Chancellor Jeremy Hunt signed a Memorandum of Understanding with the European Commission re regulatory co-operation on financial services but stopped short of what the City really wants – “equivalence”. Still, it’s a step in the right direction! Meanwhile, Bank of England governor Andrew Bailey blamed Covid for prompting inflation – not Brexit, but TBH all the central bankers got it wrong!

IN COMMODITIES NEWS…

• It looks like the actual take from the government’s windfall tax could be 60% less than expected, according to oil specialists Wood MacKenzie. They say it’s because the oil price has weakened…
• Oil and gas companies are trying to diversify into lithium. Companies including ExxonMobil, Schlumberger, Occidental Petroleum and Equinor are looking at whether they can use their knowledge in oil extraction in the extraction of lithium from brines (a process known as Direct Lithium Extraction).
• Talking of lithium, Cornish Lithium has to find £10m by the end of July to avert collapse! On the other hand, rival British Lithium just got an agreement with French mining company Imerys to develop the UK’s first lithium mine – in Cornwall! You do wonder whether this development will make it more likely for Cornish Lithium to get money given that activity will be going on in the area anyway…

IN BUSINESS TRENDS…

• RE CHINA – companies are having to think of ways of accessing the potentially highly lucrative China market whilst not upsetting the Americans and triggering any sanctions. That said, other companies – like GLG – are scaling back their China exposure as it is being targeted by authorities. China has also just passed laws to make it easier to combat foreign sanctions. The downside is that it could potentially put investors off as it will make things more uncertain.
• RE THE MIDDLE EAST – Law firms continue to head to Saudi Arabia as there is actually M&A activity going on over there as opposed to the lack of action in Europe and the US at the moment! Also, there’s just been a law change making it easier to set up. Kirkland & Ellis, the world’s biggest law firm by revenue is taking a serious look at options in Riyadh where it would potentially join the likes of Latham & Watkins, Greenberg Traurig, Squire Patton Boggs, Dentons, Clifford Chance and Herbert Smith Freehills.
• IN OFFICE PROPERTY – HSBC announced that it would be relocating from its current HQ in Canary Wharf in 2027 to the City. This has all come about because of the whole WFH thing and the consequent reduction in the need for office space. It is thought that other big tenants could be at least considering a similar move.
• IN ACCOUNTANCY – KMPG announced that it would be cutting 2,000 jobs due to a fall in demand for consultancy services. PwC managed wage expectations of its 25,000 UK staff in the downward direction, blaming the “challenging” market backdrop. Professional services, including areas like management consultancy, have all been having a rough time of it recently.
• IN LAW – the Ministry of Justice has declared a new law that will ban Kremlin-linked individuals and businesses from accessing UK legal advice.

IN CONSUMER TRENDS…

• IN REAL ESTATE – the impact of rising mortgage rates is likely to exceed the impact that energy bills had earlier this year, according to analysis by the Public First consultancy.
• IN FOOD PRICES – there’s more evidence that food price inflation has topped out, according to findings by the BRC and the observations of supermarket chiefs.
• IN CAR INSURANCE – the latest data from the ONS shows that car insurance premiums have shot up by a massive 43.1% in the last 12 months! It’s even worse for some customers of Direct Line who’ve seen increases of between 50% and 75%!
• SO WHAT’S THE GOVERNMENT DOING ABOUT IT? Chancellor Hunt got all the watchdogs together to make sure consumers aren’t getting ripped off. The FCA, CMA, Ofcom, Ofgem and Ofwat were all in the meeting but it didn’t sound like anything particularly concrete came from the meeting. At least the government is showing willing, I suppose!
• WHAT ARE CONSUMERS DOING AT THE MOMENT? They withdrew a record amount of savings in May at the fastest rate since these stats started to be collated in October 1997! It looks like the money is being spent on maintaining living standards and/or paying off mortgages or loans before higher interest rates kick in. They are having to spend more on package holidays as prices to the most popular Mediterranean destinations have shot up massively. They’re not spending as much on cards, according to Moonpig. Although annual sales increased because of higher prices, volumes fell.
• It looks like food producers are hitting the limits of being able to pass prices onto customers as General Mills (which owns tons of famous brands including Yoplait, Nature Valley, Old El Paso etc.) reported disappointing sales numbers. The news hit sentiment in Mondelez International and Kraft Heinz. Pet food is still doing well, though!

IN AI NEWS…

• Open AI and Microsoft are getting sued over the alleged theft of private data via “secret scraping” in order to train their chatbots. IMO, this is a $3bn class action lawsuit that could potentially end the frenzy in AI if it is found to have merit.
• Speaking of frenzy, one-year-old AI start-up Inflection AI just raised a whopping $1.3bn in funding from a group of investors including Microsoft and Nvidia. One of the key things here for Inflection AI (apart from the money!) is that Nvidia’s involvement will give it access to 22,000 Nvidia H100 GPUs, the hottest AI chips on the market. The AI frenzy continues…
• The gaming industry is going to see how AI integration could enhance the gaming experience as Unity Software just released some new tech that simplifies the creation of 3D assets which could significantly reduce development costs. Also, Chinese gaming giant NetEase launched Justice Mobile, a multi-player game that has AI-powered characters. Will this make the gaming even more addictive?
• News publishers are making the rare move of getting together to form a coalition to collectively face the impact of AI. They are looking at how they can monetise the use of their content by AI.

IN OTHER TECH NEWS…

• Apple edged closer to the $3tn market cap level which it touched in January 2022 a few times (although it couldn’t finish the day’s trading at that level). However, this week, it did close at this level – making this one company more valuable than the entirety of the FSTE100!
• Microsoft and Activision Blizzard chiefs appeared in court this week to fight for their $75bn deal and a decision could be forthcoming next week. It’s not a certainty that it’ll be torpedoed – and if it isn’t, the UK’s CMA will be the only entity blocking the deal.
• Twitter’s new strategy was unveiled this week as new CEO Linda Yaccarino outlined a number of measures designed to get advertisers back onside. One of the measures is a new video ads service – but there are many others!
• German online retailer Zalando became the first legal test for the upcoming Digital Services Act. The EU’s landmark act, which will force Big Tech to take more responsibility for content on their platforms, identifies 19 companies as “very large platforms” for the purpose of its legislation, which means that they have to adhere to stricter guidelines. Zalando has been classified as such and it is objecting to this given the responsibilities will be more onerous.
• The Biden administration is looking at ways of further tightening the supply of AI chips to China, but it’s a tricky balance because slowing China’s advance will mean less profit for American companies like Nvidia in the short term – and it will also encourage China to develop their own tech which could permanently shut them out in the long term.

IN RETAIL NEWS…

• Gucci’s owner, Kering, bought perfume maker Creed as part of its plans to expand further into the world of cosmetics and fragrances. It is building a new beauty division because it believes this is a great entry point into the brand that customers then grow with.
• It was a week of more stake-building in retail as Frasers Group increased its stake in Currys from 9.4% to 10.4% and added to its stake in AO World, bringing its share of the company to over 22%. Meanwhile, Lingotto Investment Management (which is backed by the powerful Agnelli family and is chaired by ex-UK chancellor George Osborne) has increased its stake to above 5% in Ocado. This is quite interesting given recent rumours of Amazon and Ocado. Will more bidders emerge?
• Mulberry saw sales of handbags dip which it blamed on fewer visitors to the UK, which in turn it blamed on the government’s decision to scrap VAT-shopping in the UK.
• At the other end of the scale, Associated British Foods had a decent quarter, prompting it to upgrade its earnings forecasts for the year. It added that Primark’s sales increased by 13% and that it was still able to pass on price rises to customers.
• Boots said it would be shutting 300 stores in the UK as owner Walgreens Boots Alliance cut its earnings forecasts for the year whilst increasing its cost-savings target. There was no real word on a business strategy to spark things back to life.
• B&M announced a strong performance for Q1 but remained quiet about prospects for the full year. Its bargain offering is striking a chord with budget-challenged customers at the moment.

IN LEISURE NEWS…

• Cineworld (at last) called in the administrators and there will be a debt restructuring. Its business will carry on as usual but you’d imagine there will be some “streamlining” to come to get finances back on track as quickly as possible…
• Merlin Entertainment returned to profit last year and consumer demand remained strong over Q1. There are plans to expand the number of Lego and Peppa Pig theme parks over the coming years. I think that Merlin will continue to do well because my working theory at the moment is that consumers will go on fewer holidays next year as mortgage costs bite deep and that they will instead have more days out to places like theme parks.

• IN AUTOMOTIVE NEWS – Aston Martin struck a deal with America’s Lucid to buy its batteries, motors and drive trains and laid out plans to quadruple profit within five years. This is clearly ambitious, but with more backing from the Saudis it sounds more plausible…Ford announced plans to cut at least 1,000 salaried and contract workers, but I think this was well-flagged. In EVs, Lordstown Motors filed for bankruptcy protection after the disintegration of its much-vaunted deal with Foxconn and China’s NIO is having a rough time as rivals cut prices to increase volumes. That said, it did get a handy $740m investment from an Abu Dhabi government-backed group only last week.
• IN WATER NEWS – the whole UK water sector faced its biggest crisis since it was privatised in 1979 and there is talk of some kind of government bailout of Thames Water. Ofwat previously identified Thames Water and four others as looking a bit tricky on the financial front in a report last year and Yorkshire Water announced a £500m fundraise this week to shore up its finances. In the meantime, Thames Water has parachuted in a corporate turnaround veteran, Sir Adrian Montague, to get things back on track.
• IN FINANCIALS NEWS – UBS looks like it’s about to cut the number of Credit Suisse employees by more than half in the aftermath of the enforced takeover (but we already knew this was likely). In the UK, Chancellor Hunt demanded action from banks to reward savers, payments group Wise saw its share price rise by over 20% on news that higher interest rates would continue to improve profits and CAB Payments announced that it was seeking an £850m valuation in a planned IPO. This is unusual because companies coming to market generally announce a range rather than a specific valuation so we’ll just have to see if there’s an appetite for it.
• IN PROPERTY NEWS – the New York office market got a boost as its biggest landlord, SL Green, agreed to sell a 49.9% stake in Manhattan’s 245 Park Avenue Building to Japan’s Mori Trust, giving it much-needed liquidity. It remains to be seen as to whether this is the early sign of a turnaround in the office market or whether it’s just a one-off. In UK residential property, Zoopla observed that property prices are weakening due to a combination of rising mortgage rates and the ongoing cost-of-living crisis. Discounts on the asking prices are widening.
• IN INDIVIDUAL COMPANY NEWS – Serco got a nice 10% bump in its share price yesterday thanks to news that it had increased its profit forecasts due to rising demand for immigration services and from the defence sector. Also, Salesforce announced it would invest $4bn in Britain over the next five years, which is a definite boost for the tech sector!

My favourite “alternative” story this week was Cocktail fans are only just discovering how to drink a pornstar martini properly (The Mirror, Danielle Kate Wroe) as I am ashamed to say that I never knew this!!! Anyway, now I do 👍