Watson’s Weekly 05-08-2023

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 when the US got downgraded, Apple beat expectations and Uber posted its first ever quarterly operating profit!

• IN GLOBAL NEWS – El Niño is coming and it is expected to play havoc with harvests across south-east Asia, Africa, Australia, southern parts of the US and South America. It is expected that South America alone will take a $300bn impact thanks to global changes in temperature and rainfall. It’s potentially going to push up food prices at a time where consumers are already feeling the pinch.
• IN US NEWS – Fitch downgraded America’s AAA credit rating one notch to AA+. It pretty much boiled down to the polarizing effect of both parties on a weak government, meaning that it’s very difficult to get anything done because each party has its own agenda.
• IN EUROPE NEWS – the Eurozone economy returned to growth in Q2 thanks to weakening headline inflation. That said services sector inflation is still a problem, so there’s still work to do (i.e. interest rates still need to go up from here).
• IN SAUDI ARABIA NEWS – bank borrowing costs have hit record levels, putting Crown Prince Mohammed bin Salman’s plans to wean the country off fossil fuels in difficulty. The IMF’s most recent report slashed its growth forecasts by the biggest margin of any major economy in the report!
• IN TURKEY NEWS – inflation jumped to 47.8% thanks to a weaker lira, an overheating economy and rising taxes as reality hits after Erdogan’s re-election. The new finance minister is taking a much more traditional approach to inflation.
• IN UK NEWS – the Bank of England raised interest rates by 0.25%, an amount that was widely predicted as it continues to combat inflation. There are signs that inflation’s momentum is weakening but the Bank reckons that interest rates could stay above 5% until 2026.

IN OIL NEWS…

• Western oil and gas majors are to face renewed focus on their plans to net zero after a long period of bumper profits. That said, Chevron, Eni, Equinor, ExxonMobil, Shell and TotalEnergies recently reported weaker Q2 earnings – which was then followed up this week by BP reporting disappointing profits.
• Oil prices rose going into the end of the week as Saudi Arabia warned that warned that it would make deeper production cuts, something that was presumably at least partly motivated by putting a dent in its borrowing costs, as per what I said above.

IN COMMODITIES NEWS…

• Wheat prices rose by 5% after an overnight Russian drone attack on Izmail, Ukraine’s main inland port. Wheat and corn prices  had been weakening this weak on hopes that better output in other markets could make up the shortfall.

IN BUSINESS TRENDS…

• The doom and gloom continues as the latest Lloyds Bank Business Barometer showed that business confidence fell overall last month, the S&P Global survey showed that manufacturing activity fell in July at the steepest rate so far this year and the services sector showed its slowest rate of growth so far this year. Ouch!
• Profits have stalled at London’s “magic circle” firms as rising staff costs, less M&A advisory work and the cost of US expansion have cumulatively taken their toll. The pay differential between US lawyers and UK lawyers is still big (US law firms can afford to pay more because of higher profitability) and so there’s a danger that even when M&A activity bounces back profits will still be dented by higher wage costs.

IN CONSUMER TRENDS…

• More lenders cut their mortgage rates after the Bank of England increased interest rates in line with expectations while mortgage approvals and consumer credit have jumped despite interest rates being higher. House price discounts have deepened as sellers seem to be getting more nervous and buyers seem to be getting more frugal and more buyers are taking out longer mortgages so they can make the payments.
• On the high street, the BRC’s latest report said that shop price inflation slowed down to its lowest level this year in July while another report by MRI Springboard said that high street sales were weakened by a combination of rainy weather and train strikes.
• A really interesting report was released this week by Ofcom which showed how much TV viewing is changing. It’s not really surprising that streamers and other digital sources are getting more popular that terrestrial TV, but the world of advertising is going to have to continue to adapt to changing viewing habits.

IN CONSUMER GOODS NEWS…

• Both Diageo and Molson Coors put in strong performances and had positive outlooks whereas Heineken posted disappointing numbers recently and had to cut their full year profit forecasts as customers balked at having to pay higher prices.
• Adidas was no doubt relieved as sales of its first batch of Yeezy trainers post the Ye-break-up went well, allowing it to pay him off and pay anti-racism and anti-semitism charities. Its Q2 results were solid and it sounded mildly optimistic about the rest of the year.

IN RETAIL NEWS…

• Amazon delivered “amazing” results that shocked the market! Its Q2 earnings came in at almost double market expectations after a tricky period where it cut costs and streamlined the business.
• In the UK, Next put in a solid performance as customers spent more than expected on clothing. It seems that it has the right balance between its offline and online capability but surely the squeeze on household incomes is going to kick in at some point!
• Pets at Home continued to benefit from the lockdown pet boom as customers are more willing to cut on expenses for themselves than they are for their pets.
• Budget retailer Wilko is at risk of collapse. It’s brought in the administrators and it will have two weeks to find a buyer for all or part of the business and will be protected from creditors during this period.

IN RESTAURANTS…

• Greggs unveiled a healthy set of results which were powered by extended opening hours and new food ranges. It wants to continue the momentum and expand by opening outlets in airports and at railway stations.
• Starbucks’ Q3 results fell short of market expectations due to a sluggish performance in the US. China was actually very strong, but not strong enough to take the edge off.

• IN CHINA – US sanctions on advanced chips are starting to bite, which is hampering its China’s tech development for now. Biden is considering additional restrictions but ultimately China may have the last laugh when its domestic capabilities catch up and can effectively exclude the US from what will be one of the world’s biggest markets. Chinese authorities are also proposing even tighter limits on kids’ use of tech just two years after restricting kids to three hours per week gaming and want hardware and software makers to roll out a new “Minor Mode” where usage and time limits can be set.
• IN CHIP NEWS – SK Hynix and Samsung are benefiting from the popularity of AI and demand for their High Bandwidth Memory chips (“HBM” chips), Qualcomm announced disappointing results due to a sluggish smartphone market (which is its core market) and Arm’s owner SoftBank is aiming for a very high valuation for Arm (about $70bn) for its upcoming IPO, which looks a bit toppy considering that smartphones aren’t the hot area they once were compared to AI!
• IN AI NEWS – there’s ongoing debate as to who controls AI content and whether workers in AI should be licenced, as per those who work in the nuclear industry. Pearson is embracing AI and is using it to enhance its Pearson+ app to help provide real-time support for students while Meta is going to launch new AI-powered chatbots with different personalities (called “persona”). This could provide a bit of fun for users and encourage more engagement IMO, which in turn will improve the chatbots!
• IN OVERALL TECH NEWS – Apple beat expectations for the quarter despite smartphone revenues falling short of estimates because of strong revenues from its services business. I suspect that things will improve on the hardware front in the next quarter, though, as the iPhone 15 is expected to launch. Microsoft’s massive Activision Blizzard takeover is facing further scrutiny from the CMA. If the CMA overturned its previous decision to reject the deal it would be the first time it has ever changed its mind at such a late stage – so I guess it has to drag its feet a bit to make it look like it’s thinking hard! Meanwhile, Meta’s facing pressure from human rights groups for not doing enough to remove harmful content and misinformation online. Elsewhere, Sam Altman’s Worldcoin project hit a hurdle as Kenya banned it whilst it investigated data privacy and security concerns while Nintendo put in a storming performance thanks to the buzz created by the Super Mario film and the new Zelda game.

IN BATTERY NEWS…

• Panasonic is ditching the manufacture of LCD panels to concentrate more on the production of EV batteries. The race is on to make money doing this before such batteries become commoditised.

IN CAR NEWS…

• BMW got hit by higher-than-expected production costs for its EVs which squeezed its margins.
• Aston Martin appealed for even more money from investors (it keeps on doing this) to pay off its most expensive debt, but this time it seems that the company is looking in better shape than it has been in before.
• Ferrari put in a strong Q2 performance and raised its full-year forecasts and owners devoured the options lists. It continues to roar ahead!

• IN BANKS NEWS – Bank of Ireland joined rival AIB in reporting bumper profits as they both made money from the high interest rate environment. Virgin Money said that it was setting aside more money for bad loan provisions as it predicts more pain from the cost-of-living crisis.

MEANWHILE, ON THE BUY-SIDE…

• Ethical funds saw their biggest-ever funds outflow in July as investor scepticism increased. It’s the third month in a row that ESG funds have seen outflows.
• Hedge fund manager Man Group had a shocker after it admitted that both its performance fees and profits weakened considerably. It reiterated its commitment to growing its credit offering as it broadens its revenue streams.
• Apollo Global Management’s CEO said he reckoned a golden era for private equity firms is ending as cheap money and dwindling number of targets is making their job harder. That said, KKR is closing in on buying publisher Simon & Schuster for about $1.65bn.

IN COMMERCIAL PROPERTY NEWS…

• It turns out that Blackstone’s flagship $68bn property fund has been selling down its portfolio and ploughing the proceeds into AI data centres to take advantage of the AI boom.
• According to Rightmove and EG, office space demand is rising above pre-Covid levels overall but it does vary geographically – for instance, it’s rising in Scotland and falling in London.

IN RESIDENTIAL PROPERTY NEWS…

• Nationwide’s latest house price index highlighted the fastest fall in house prices for 14 years, with more to come…
• Data from real estate adviser CBRE shows that more landlords are deciding to sell their properties because mortgage costs are going up so much. This is clearly bad news for renters as there will be fewer rental properties on the market, which means that rents will go up.
• Taylor Wimpey reckons that home-buyer demand is still strong – and this may be helped by mortgage lenders cutting their mortgage rates to attract more business.

• IN PHARMACEUTICALS NEWS – Novo Nordisk and Eli Lilly are facing lawsuits for alleged horrendous side effects, that include constant vomiting, from their blockbuster weight-loss drugs. This could be massive – and very expensive for the pharmaceuticals companies concerned. Elsewhere, Pfizer’s revenues have more than halved over the quarter thanks to the drop in demand for Covid vaccines, but it warned that if things don’t turn around, it will embark on a cost-cutting programme…
• Budget airline Wizz Air put in a lacklustre performance for the quarter as the gap between it and rivals Ryanair and EasyJet widens. It’s now paying the price for not hedging against rising oil prices and not having the same ability to hike prices to the same extent.
• Rolls-Royce published great results for the first half, but everyone was expecting this after they published a very positive unscheduled trading statement last week. They are awaiting a government decision on whether they can go ahead and build their SMRs.
• BAE Systems reported record orders, but then that’s hardly surprising considering the ongoing Ukraine war and politicians’ boosting of defence budgets around the world.
• Uber managed to make its first ever quarterly profit but ongoing tightness in labour markets and driver frustration towards rising “take rates” means that it might lose drivers, which will ultimately hit its finances.
• Rishi Sunak is planning the biggest expansion of private sector involvement in the NHS since Blair was in power in order to clear the massive backlogs and waiting lists. Companies such as InHealth will get involved with the setting up and running of community diagnostic centres which are intended to speed up the process.

My favourite “alternative” story this week was the one about the unusual challenges in Only 1% of people can do these ‘impossible’ body tricks – is that you? (The Mirror, Danielle Kate Wroe). These things (and people!) are amazing!