Watson’s Weekly 02-11-2024

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.

• IN THE US – we saw GDP increase by 2.8% year-on-year in Q3. This is slightly lower than the 3% we saw in Q2, but it’s positive nevertheless. Musk and PAC are being sued by Philadelphia’s chief prosecutor over Musk’s $1m-a-day giveaway (I think this is all noise, BTW, so wouldn’t pay too much attention to this). The result of the election is far from certain but if Trump wins there could be serious implications for the UK as it’s our biggest individual trading partner and I don’t think he likes us very much (particularly after that stunt that Starmer pulled by sending helpers for Harris’s campaign).
• IN JAPAN – the snap general election result proved to be a disaster for the ruling LDP but PM Shigeru Ishiba vowed to stay on despite the LDP’s worst performance for 15 years. No one party has the majority needed to control parliament so parties now have 30 days to form some kind of coalition. Good luck with that.
• IN EUROPE – there was an unexpected rise in eurozone inflation, which means that it’s a bit less likely that we’ll see a 0.5 percentage point interest rate cut from the ECB (so probably the more usual 0.25 percentage point cut), but although Germany’s fragile coalition has been looking a bit precarious its economy managed to produce a tiny bit of GDP growth which meant that it avoided recession 🥳. There was more good news as the IMF reckons Spain could overtake the US to be the world’s fastest growing major economy and grow at triple the rate of the whole of the Eurozone!
• IN THE UK – it was all about the new government’s first Budget this week! Overall, huge spending plans for the NHS and schools are being funded by higher taxes on affluent individuals and businesses. Given how much of it was trailed in the lead-up, it looks unlikely that the Bank of England will change its plans for interest rates (and the chances of another interest rate cut rose thanks to BRC figures showing weakening shop prices) but there were plenty of people and businesses who felt aggrieved. Meanwhile, we saw that London’s AIM market shrunk to its smallest size since 2001, assisted most recently by company owners acting on fears of what Reeves’s Budget would bring.
• IN SAUDI ARABIA – we heard that the kingdom’s sovereign wealth fund, the PIF, is going to change tack and concentrate more on domestic investments from now on than overseas ones. This is a major development considering the huge amounts it has invested in overseas businesses over the last ten years. This is quite interesting as it potentially cuts off another source of potential funding for companies and/or projects.

IN COMMODITIES NEWS…

• Gold demand continues to be strong despite central bank buying momentum slowing down. It seems that investor FOMO is high as both the value and volume of gold traded has hit record levels.
• Oil prices weakened after both Israel and Iran showed restraint amidst ongoing tensions but I imagine we’ll see a lot of volatility as it is sensitive to developments in the conflict. BP reported its lowest profits since the pandemic but while Shell’s results were solid, the oil major voiced the need for more certainty from the government over the future of the North Sea so it can invest accordingly.

IN BUSINESS TRENDS NEWS…

• We see that some big western corporates – including Carlsberg, Estée Lauder and AB InBev have been going all downbeat on their prospects in China as they remain sceptical as to whether recent stimulus measures will be enough to drag the country out of its economic rut.
• Eyewear giant EssilorLuxottica and Meta are going all-in on efforts to bring consumers a new category of wearable – in the form of smart glasses. They hope that they will be able to develop smart glasses that both look good and have decent functionality. They are not the final article just yet – but it seems they are gradually getting there!
• It was really interesting to hear about research from Hampton’s and Nottingham Uni’s economics department which showed that limited companies are dominating buy-to-let purchases of late – so this would imply that actually the number of rental properties might not be going down as much as everyone’s thinking because the “new” buyers are also landlords (but just under the guise of being limited companies).

• Tech got sold off big time on Wall Street, wiping out all the gains seen in October.
• IN AI-RELATED NEWS – Amazon’s strong performance came thanks to the ongoing success of its cloud business, which is due to the huge rise in AI development demand and OpenAI launched the roll-out of its new AI-powered online search tool (which I think should scare Google!). Apple started its AI rollout (but sounded a cautious note for the crucial coming quarter), Alphabet got a boost from AI-driven growth for cloud computing sales and search engine advertising as Microsoft also benefited from strong cloud-related revenues.
• IN CHIP NEWS – Samsung reported lower earnings in its chip business as it’s still behind rivals on the most advanced chips and getting squeezed at the other end of the scale by Chinese chipmakers flooding the cheap end of the market while Intel announced that it was taking a massive $18.7bn charge for restructuring and impairment, although it’s quarterly results came in better-than-expected.
• IN DATA CENTRE NEWS – Segro said that it was keen to invest a lot more money in building new data centres but the main limiter is getting access to the electricity needed for such sites. It was also interesting to hear the CEO of Danfoss, that makes heat pumps and data cooling systems, reckons that the heat generated by data centres could potentially be harnessed to heat cities if properly located!
• IN SOCIAL MEDIA – Meta’s earnings beat forecasts for Q3 but the company cautioned that it would be spending a lot on AI development next year and losses from Meta AI, its AR and VR business, are likely to “increase meaningfully”. Reddit’s share price shot up by 25% on news that it turned its first profit while Snap continues to be in the doldrums as its attempts to sell hardware (in the form of gadgets), stem the fall in ad revenues and cope with the senior management changes continue to fail.
• Elsewhere, Siemens bought Altair for $10.6bn in an all-cash deal to boost its capability in manufacturing simulation software as this segment continues to consolidate. Also, Super Micro Computer saw its share price tank by 30% after its auditor, EY, resigned after expressing a number of concerns. This follows on from a recent damaging report from Hindenburg Research that highlighted dodgy accounting.

• The EU went ahead with imposing tariffs on Chinese EV imports but talks will no doubt continue between both sides.
• Northvolt is getting bought out of its battery gigafactory joint venture with Volvo Cars, signalling the latest blow for what was supposed to be Europe’s big hope for EV batteries.
• VW’s nightmare continues as it announced factory closures and job losses thanks to ongoing difficulties in making the switch to EVs. Ford announced that it was suspending production of its F-150 Lightning electric pick-up truck thanks to sluggish demand while we saw BYD overtaking Tesla for the first time in quarterly revenues.
• In other individual carmaker news, Land Rover and Range Rover benefited from decent sales of hybrids but Stellantis reported a drop in car sales and Aston Martin missed all of its targets yet again.

• CAR FINANCING IS LOOKING LIKE IT’S GOING TO BE THE NEXT PPI – and Lloyds braced itself for the repercussions of the landmark Court of Appeal ruling last Friday which declared that car financing had been mis-sold for a number of years – and that customers would have to be compensated. Banks, the Treasury and the FCA met up to talk about what comes next while car dealerships were reeling as lenders pulled out of car financing en masse. This could be absolutely huge.
• IN BANKS NEWS – UBS announced better-than-expected quarterly profits as the integration of Credit Suisse continues to go well, Santander UK decided to delay results as it announced job cuts as part of its streamlining plan and both HSBC and Standard Chartered managed to post some decent quarterly numbers. HSBC an Standard Chartered are putting more resource into growing their wealth management businesses.
• IN WEALTH/INVESTMENT MANAGEMENT – Hargreaves Lansdown customers rushed to cash out ahead of the Budget by selling down their share holdings while venerable asset manager Franklin Templeton saw record outflows as clients reacted badly to the company being investigated by the SEC as well as years of poor performance.

• Puig reported a decent increase in revenues for Q3, which came in above expectations while Prada also managed to put in a decent performance for the first nine months – which all goes to show that not everyone in the luxury space is losing out (like LVMH and Kering, for instance).
• There were mixed fortunes on the UK high street as Next put in a strong performance and was confident enough to up its year-end forecasts while Selfridges’ losses doubled (although it must be said that it has been through a very turbulent period of late).
• Other than that, the EU launched an action against Temu over concerns that it is not doing enough to prevent the sale of illegal products. If Temu is found to be in breach of the new Digital Services Act, big fines will follow.
• IN CONSUMER GOODS – Estée Lauder’s shares tanked as the company not only slashed its dividend by 47% – it revised its targets down for the full year after reporting another weak quarter. Cosmetic companies are having a ‘mare at the moment, what with L’Oréal and Coty among those reporting poor performances.
• IN REAL ESTATE TRENDS – the number of first-time buyers has surged, according to stats from Zoopla and the latest Bank of England figures show that the number of UK mortgage approvals are at their highest levels since 2022 mini-budget. Given what happened in the Budget (stamp duty deadlines not being extended), continued strong demand for property (particularly as prices are going up) and a robust labour market I would have thought that the housing market is going to be very active indeed.

IN LEISURE…

• IN RESTAURANTS – McDonald’s saw its biggest drop in global sales for four years thanks to weakening demand prompted by falling consumer spending in China and the ongoing impact of the war in the Middle East. Starbucks’s new CEO is getting stuck in with ordering staff to RTO as he implements new measures to get footfall back up.
• High-end all-inclusive resorts in Europe are gaining in popularity. Hyatt and Marriott are scrambling to keep up with demand – although Hyatt is ahead of its rival regarding this trend at the moment. It sounds like a very attractive growth area!

• Boeing managed to raise up to $19bn which should help to keep the wolf from the door but it’s still got the strike to contend with as well as ongoing quality issues.
• Czech power company CEZ has just bought a 20% slice of Rolls-Royce’s SMR business for an undisclosed sum, which sounds like a real endorsement to me! Rolls-Royce is still waiting to hear whether it’s won the contract to build SMRs in the UK.
• Eli Lilly posted weaker-than-expected quarterly sales and profits but I wouldn’t be too concerned about that. We’ve got the festive season coming up so if things are disappointing after that, I’d be more concerned!
• PwC announced a global revenue increase of 4.3%, which is impressive given the poor performance in its Asia-Pacific division courtesy of the combination of a tax scandal in Australia and attracting punishment from the Chinese government for its role in the fall of stricken Chinese real estate company Evergrande.

My favourite “AND FINALLY” video this week was the one with a lady demonstrating some serious chopping skills!