Watson’s Weekly 04-05-2024

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.

This was the week when TikTok’s spat with Universal ended, when Peloton’s boss stepped down and when McDonald’s said it would double down on China…

• IN THE US – the Fed left interest rates unchanged and it looks like they’ll be higher for longer as Fed chief Jay Powell said that he couldn’t cut them at the moment due to “a lack of further progress” in getting inflation down to its 2% target. Biden’s administration is looking at loosening rules on marijuana as he tries to appeal to the youth vote ahead of the election. This has still got to survive a public comment period, but if the proposed changes go through, they will represent the biggest change in US drug policy in a generation!
• IN CHINA – factory activity expanded for the second consecutive month, according to the latest PMI, thanks to rising high-tech manufacturing output. President Xi is due over in Europe next week. This should be interesting as the EU is currently conducting a number of investigations into whether Chinese state subsidies have given companies and industries an unfair advantage versus European counterparts in a number of areas.
• IN EUROPE – the EU exited recession thanks to a better-than-expected performance by the economies of Germany, France, Italy and Spain over Q1. However, German inflation turned out to be stubbornly high in April thanks to strong food and energy prices. This will make it a bit more difficult for the ECB justify interest rate cuts. Meanwhile, Spain’s PM Pedro Sánchez announced that he would be staying in office after all following threats to resign after his wife got caught up in corruption charges. Elsewhere, Turkey suspended trade with Israel in protest at the “humanitarian disaster” in Gaza as tensions between the two nations worsened.
• IN UK NEWS – the OECD reckons that the UK will be the worst performing economy in the G7 next year thanks to high interest rates and the ongoing effects of inflation. It also believes that the US and Canada will be the best performers in the group. Meanwhile, Sunak’s fate could be decided in the local elections this week while council problems persist as their debt keeps rising. The UK manufacturing sector fell back into contraction, although at a slower rate than the market had been expecting. Red sea problems, uncertainty about the prospects for the UK economy and the running down of inventories all played their part in the weakness. Meanwhile, Scotland’s First Minister, Humza Yousaf, resigned. The SNP subsequently scrambled to find a suitable “safe pair of hands”.

IN COMMODITIES NEWS…

• IN OIL – Gazprom had its worst loss in decades as sanctions have pretty much taken Europe out of the equation as gas customers. On the other hand, Shell posted better-than-expected Q1 results and delighted investors even more by announcing a $3.5bn share buyback to be executed over the next three months.
• IN COCOA – the price of cocoa futures dropped by 16% since last week after almost tripling in value this year alone – but there was no particular explanation, so this might just be a temporary thing.
• IN LITHIUM – Weardale Lithium has announced plans to mine 10,000 tonnes of lithium a year from rocks underneath a County Durham beauty spot. If this turns out to be viable, it means that the UK could cut its complete reliance on imports which mainly come from Australia and South America.
• IN LIVESTOCK – US cattle prices have been weakening thanks to an outbreak of bird flu. The USDA remains confident in the country’s meat and dairy supplies but traders are being more circumspect, believing that the news could hit demand.

IN ENERGY NEWS…

• Cheap solar power is boosting the prospects for desalination plants. The process of desalination is very energy-intensive so cheaper solar power for countries like Egypt, Algeria and Morocco will be very welcome.
• The boss of wind developer Ørsted believes that high interest rates will keep the costs of renewable energy high, although he also believes prospects are looking up after what was a pretty disastrous 2023.

IN CRYPTO NEWS…

• Binance’s founder, Changpeng Zhao, just got sentenced to four months in jail after pleading guilty of money laundering and breaking sanctions laws. Maybe this will give fellow crypto-king Sam Bankman-Fried hope as he was sentenced to 25 years in the slammer for his deeds.

IN BUSINESS TRENDS NEWS…

• City law firm Mayer Brown is the latest law firm to split out its China operations to avoid potential entanglement in the ongoing US-China trade tensions. Dentons, Latham & Watkins, Winston & Strawn and Linklaters are among the other law firms that have either separated out, slimmed down or shut down their operations in China.
• A record backlog of new aircraft built up over Q1 as the industry was hit by delivery delays and capacity problems.
• Shipping giant Maersk saw its profits sink thanks largely to Red Sea problems. On the plus side, the company said that it thought that losses for this year would actually be better than expected as volumes are trending up.
• Rapid delivery firm Getir is quitting its business in the UK, Germany, the Netherlands and US to retreat to its domestic market in Turkey. Competition has been fierce and I’d suggest that there’s only limited longevity for this kind of business as it strikes me as being one of those things that works when the economy is on fire (everyone’s cash-rich and time-poor) and goes down the toilet when things aren’t going so well (everyone’s focused on costs).

IN EMPLOYMENT TRENDS…

• Job vacancies fell again last month – by 17% – in further evidence of a cooling market. The report also said that jobs in advertising, marketing and PR fell by 11% in March versus the previous month as corporates slashed marketing budgets. Does this mean that it’ll be easier to justify interest rates cuts sooner-rather-than-later??
• UK universities face more course closures and job cuts after struggling with the freeze in tuition fees for domestic students, which still has at least two years to run. They want help from the government but their pleas seem to be falling on deaf ears as the government says that they are offering too many courses that don’t offer a decent return and that they’ve become too reliant on fees from overseas students.
• Business travel has been returning back towards pre-pandemic levels in the US according to reported flight and hotel bookings. One wonders whether this implies that the prospects for the likes of Zoom and others are going to be limited.

IN AUTOMOTIVE TRENDS NEWS…

• Wallenius Wilhelmsen, the world’s biggest car-carrier, says that an expected surge in the number of car-carrying ships will flood ports with vehicles, leading to congestion at terminals getting even worse. The recent influx of vehicle exports from China has caused bottlenecks at many European car import terminals.
• Researchers at Rhodium Group published a report which says that although the EC is expected to impose import duties on Chinese EVs of 15-30% following an investigation that expected to conclude in the next few weeks, it actually needs to impose taxes of around 50% to stop the influx of cheap Chinese EVs!
• While all this anti-China stuff is going on more carmakers are announcing tie-ups with Chinese rivals in China’s domestic market to take advantage of superior Chinese technology. Toyota’s teamed up with Tencent, Nissan with Baidu and Hyundai with CATL.
• Chinese EV makers BYD, NIO, XPeng, Geely’s Zeekr and newcomer Xiaomi reported strong EV sales in April but hybrid vehicle specialist Li Auto lagged behind – the opposite to the trend that we are seeing in the West.

IN INDIVIDUAL COMPANY NEWS…

• Tesla had an eventful week? It started off with Musk popping over to China for a surprise visit to meet Premier Li Qiang to talk about deploying fully driverless technology. The China Association of Automobile Manufacturers said that Tesla’s Model 3 and Model Y cars passed the requirements of China’s data security rules and Tesla also announced an agreement with Baidu, for its mapping licence for data collection on China’s public roads. Later in the week, Musk fired the entire supercharger team which caused somewhat of a kerfuffle as it caught the entire industry by surprise.
• Meanwhile, Aston Martin’s losses almost doubled as SUV sales plunged. It’s got new models coming out by the end of this year which should hopefully revive demand.

IN CONSUMER TRENDS NEWS…

• Food importers in the UK are being hit by new post-Brexit checks that came in this week on animal and plant products entering from the EU. They say that this could increase costs by up to 60%, which will probably be passed on to the end customers and put smaller importers out of business.
• Non-food shop prices dropped in April, according to the latest stats from the BRC. This should be good news for household budgets.
• A survey by Deloitte showed that the cost-of-living has led to Britons spending less money in pubs and bars than at any time since the end of lockdown as higher costs have continued to weigh on households. On the plus side, a separate survey by Deloitte showed that consumer confidence hit a two-year high in Q1 of 2024.

IN CONSUMER GOODS NEWS…

• Puig Brands – which owns brands including Jean Paul Gaultier, Carolina Herrera, Paco Rabane and Nina Ricci – priced its IPO at the high end of the range. The offering was many times oversubscribed, highlighting its popularity.
• Mulberry sales fell, according to its latest trading update. The company painted a downbeat picture of the outlook, saying that the UK and China markets will continue to be challenging. I think it’s suffering from being at the “low” end of luxury brands which means that its core customers are more likely to be feeling the pinch from the current cost-of-living crisis.
• At the more realistic end of the market, Adidas posted better-than-expected profits for Q1 thanks to improved inventory levels, lower sourcing costs and a better business mix.

IN RETAIL NEWS…

• IN APPAREL – Frasers hoovered up the brand and IP of MatchesFashion out of administration, for an undisclosed sum, which excluded its stock and employees. Online luxury has had a particularly rough ride, presumably as part of the attraction of shopping at these kinds of places is more influenced by experiences, which you only really get in a shop. Next managed to post better-than-expected sales growth over Q1 and Spanish fashion retailer Mango announced plans for more UK stores as part of its global expansion plans. Meanwhile, secondhand fashion seller Vinted managed to reach profitability for the first time. This is great but rivals Depop and RealReal reported losses last year. How Vinted will fare when economies recover is, as yet, unclear…
• Amazon.com posted record Q1 sales thanks to its cloud computing business benefitting from the AI boom. It continues to spend big in AWS infrastructure and generative AI investment.

IN LEISURE/RESTAURANTS NEWS…

• McDonald’s announced plans to double down on expansion in China, but I have to say that I hope it has a Plan B given what’s happened to Starbucks in that market and what might happen if China invades Taiwan (will it be like what happened to its Russia business all over again?).
• Fast-food giants such as McDonald’s, Coca-Cola, Nestlé and PepsiCo have all observed that many low-income consumers are increasingly unable to absorb price rises and are switching to cheaper options and/or cutting their consumption. They clearly have to adapt accordingly.
• Starbucks reported a major slowdown in visits and underwhelming sales and profits over Q1. The company is planning to address this by speeding up morning service and launching some new food and beverage options.

IN COMMERCIAL REAL ESTATE NEWS…

• WeWork agreed a restructuring deal that managed to shut out controversial founder Adam Neumann. The question is whether the only way is up from here or whether the company will slide further into the abyss from here!

IN RESIDENTIAL PROPERTY NEWS…

• The latest Bank of England figures showed that mortgage approvals rose in March to their highest level since the whole Truss-Kwarteng disaster in 2022. This tallies quite well with Zoopla data which showed that UK house sales rose 12% in April. That being said, Nationwide figures showed that interest rate wobbles and rising mortgage costs led to UK house prices falling unexpectedly for the second month in a  row.
• Average rents in the UK hit a record high, according to figures from Rightmove, due to the demand for rental properties exceeding supply.

IN TECH NEWS…

• IN AI – Chinese AI start-ups are racing to catch up with the likes of OpenAI and Anthropic. Zhipu AI, Moonshot AI, MiniMax and 01.ai are leading the pack at the moment. Meanwhile, eight newspapers including The New York Daily News, Chicago Tribune, Denver Post and other newspapers are suing OpenAI and Microsoft, accusing them of scraping their copyrighted content without permission or payment. That being said, the FT signed a deal with OpenAI so that the latter is allowed to train AI models on the FT’s archived content.
• Apple saw its revenues fall, but the drop was less than the market expected and it was pretty positive about the outlook for the year. It also announced a whopping great share buyback! It also seems like Apple has been building up its AI capabilities by poaching staff from Google. Hype is building about an iPhone with on-board AI capabilities. On the downside, Huawei’s profits have boomed more than six-fold, taking some of Apple’s market share in the process – all in spite of US sanctions!
• Meta is now facing an investigation over the spread of Russian propaganda as we head towards European parliamentary elections, the UK general election and the US presidential election. The EC reckons Meta hasn’t done enough to stop the spread of disinformation.

IN MEDIA NEWS…

• TikTok had an eventful week this week! It settled its months-long spat with Universal Music for an undisclosed sum but remains defiant about a potential US ban.
• OnlyFans is now being investigated by Ofcom due to concerns that it has not done enough to shield kids from pornography. Ofcom is due to give an update of its progress in August.

IN IPO NEWS…

• Flutter shareholders voted overwhelmingly to switch the company’s primary listing from London to New York. It’s been well-flagged, makes sense (because it’s where their growth lies!) and is expected to become effective by the end of this month.
• Cruise line Viking had a successful IPO in what was the second-largest US flotation this year.
• It’s not all doom and gloom for the London Stock Exchange as a newly-established real estate investment trust (REIT) is aiming to float in London in June. Also, even if there’s a dearth of home-grown IPOs, investors can still invest in them via ETFs.
• European PE firm CVC Capital Partners started trading at over €17 per share, which was above the €14 offer price. It was a popular IPO and the proceeds will help CVC’s growth and give it currency to attract investor cash and talent.

IN M&A NEWS…

• Sony and Apollo put in a $26bn all-cash offer to snatch the initiative away from Skydance Media to buy Paramount. Skydance and Paramount have been engaged in exclusive negotiations. Paramount’s shares got a 13% bump as investors got excited about a bidding war.
• The UK’s only quote cybersecurity name, Darktrace, was taken private by US PE firm Thoma Bravo as the former accepted the latter’s £4.3bn offer.
• UK bar operator Nightcap is having exploratory talks about a potential takeover of the troubled hospitality group Revolution Bars. Talks are at the very early stages.

• IN FINANCIALS NEWS – Lloyd’s insurers Hiscox and Lancashire are counting the cost of the Baltimore bridge disaster but said that the impact “will be within expectations of this type of event”. The loss is likely to eclipse the $1.5bn of losses absorbed by the industry in the wake of the Costa Concordia shipwreck off Italy 12 years ago. The average cost of UK car insurance has risen by a third in a year, according to the latest figures from the ABI. Maybe some of that is due to the increased use of cheap Chinese phone signal jammers which have been fuelling the theft of luxury cars! Meanwhile, Goldman Sachs announced the scrapping of the bonus cap that will allow their top performers to earn up to 25 times their annual salary! No doubt all the other investment banks in the UK will follow suit (or they will see a mass-exodus of their staff!).
• IN PHARMACEUTICALS NEWS – Novo Nordisk is upbeat about the prospects for its profits this year thanks to its massively successful weight-loss drugs. Meanwhile, Johnson & Johnson proposed an improved $6.5bn deal to draw a line under its long-running talc litigation. If accepted, it would be made over the next 25 years and settle all current and future claims.
• Peloton’s latest CEO, Barry McCarthy, is stepping down given that he has failed miserably in his tenure to drag the company out of the ditch it found itself in. I think that it should swallow its pride and do its best to sell itself to a tech company (like Apple, where it could link up to its wearables) or to a premium gym chain (where it could offer a better all-round experience to gym users).
• The EC is investigating allegations of “greenwashing” at 20 airlines, including things like allegedly exaggerating their eco-credentials. The airlines in focus come from Belgium, the Netherlands, Norway and Spain.

My favourite “AND FINALLY” video this week was the one with the guy that just burst into life when the spotlight was on!