Watson’s Weekly 05-10-2024

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 WAR NEWS – Israel intensified its momentum in the Middle East by broadening its attacks to the Houthi rebels in Yemen. Although the US and allies continued to call for restraint the calls fell on deaf ears. The human cost is devastating. The impact on global supply chains is likely to be damaging but it’s too early to tell the extent of it, particularly as the situation is changing on a daily basis.
• IN THE US – Fed chief Jay Powell talked about further interest rate cuts – but specifically that they will be more of the usual 0.25 percentage magnitude rather than the racier 0.50 percentage point cut they made at their most recent meeting. Trump got a double-boost this week thanks Israel ignoring Biden’s overtures to show restraint (this makes Biden look weak) and dockers on the east coast of the US going on strike for the first time since 1977 (this makes it look like Biden’s lost control of the economy) but then a few days later, the dockers decided to suspend their strike after coming to an agreement. This must have been a relief to the Harris/Biden camp so close to the elections!
• IN ASIA – last week’s stimulus resulted in the Shanghai Composite Index’s best weekly gain since 1996! This sounds great but I’m not yet convinced that this will be the long-term stimulus that China’s economy needs. Meanwhile, the incoming Japanese PM called an October election. This will be a year earlier than scheduled but I guess doing it this way will give the winner a better mandate where they can better get their teeth stuck into the job in hand.
• IN EUROPE – Eurozone inflation dipped below the ECB’s 2% to 1.8% in September, which makes it more likely for the ECB to make its third interest rate cut in four months at its next meeting on October 17th. Economists at Goldman Sachs, JP Morgan, BNP Paribas, T Rowe Price and Danske Bank think that the ECB will make a 0.25 percentage point cut at its next meeting. PM Starmer and ECB chief von der Leyen met up to reset post-Brexit relations and agreed to have an annual summit starting from early next year to facilitate this. We’ll just have to wait to see how this pans out! Meanwhile, there was another victory for the far-right – this time it was the FPÖ party in Austria who won the parliamentary elections by a larger-than-expected margin. The march of the populists continues…then French premier Michel Barnier announced tax rises and spending cuts in an effort to narrow the public deficit.
• IN THE UK – the winter fuel allowance debate continued, but in the meantime it seems that DIY stores including B&Q, have seen a boom in sales of heat-saving equipment. The UK jobs market seems to cooling down, according to the latest data, while private sector growth also lost momentum. The Bank of England warned of a potential market correction as company valuations currently look pretty stretched but it also hinted at more “aggressive” interest rate cuts to come, which hit sterling. Later in the week, chancellor Reeves hinted that there would be a lot of capital spending in the Budget although she didn’t give any real detail.

IN COMMODITIES…

• IN OIL – prices of Brent and WTI rose after Iran’s retaliatory missile attack on Israel. Meanwhile, OPEC+ members were warned by a Saudi minister to stick to production quotas otherwise it would open its taps to put downward pressure on the oil price.
• Olive oil price rises could slow down as the drought in Spain is easing. Given that 80% of Britain’s olive oil comes from here – plus the fact that olive oil prices have shot up by a whopping 183% between December 2019 and August this year – the improving situation will be most welcome!

IN ENERGY…

• Most households in Britain are going to benefit from lower energy bills at the start of next year thanks to high levels of gas storage and LNG supplies. The energy price cap is to fall to £1,697 a year in January, which is below the £1,717 that will take effect from this week.
• It seems that AI’s insatiable hunger for electricity is prompting more interest in nuclear energy, but in the short term it seems that the Sizewell C nuclear project could be hit by more delays thanks to investment delays. And in terms of how that power is connected to where it needs to go, the government is considering planning process reforms that could cut the time to build power lines to five years. At the moment, it takes up to 14 years to identify the need for a new transmission line and building it.

IN BUSINESS TRENDS…

• China paranoia persists and now defence tech start-ups are having difficulties in developing weapons to counter China – but without Chinese components! China is the dominant supplier of batteries, motors, sensors, rare-earth materials and a plethora of other components used by US defence companies and it’s expensive – but necessary – to untangle companies from their reliance on Chinese components.
• Business confidence has fallen to a three-month low, according to a survey by Lloyds Banking Group. It seems that businesses are still cautiously optimistic, but clarity is needed from the government before anyone can do anything.
• The IPO market looks likely to be pretty quiet for the rest of the year as everyone waits to get the US presidential election out of the way (and then we’re heading into Christmas/New Year where activity pretty much dies anyway). 2024 has been pretty good but prospects for next year could be even better! Geopolitical events could still dampen enthusiasm but at the moment it seems that markets aren’t really showing too much concern about what’s going on in the Middle East and Ukraine.
• The RTO trend seems to be gathering pace, which is good news for office property companies who’ve had a pretty miserable few years. Office vacancies in places like London and New York are still high versus pre-pandemic levels but the situation is improving.

IN EMPLOYMENT TRENDS…

• Data from Adzuna shows that the UK jobs market is normalising as vacancies are falling. Competition is returning to normal levels, which would imply that wage inflation will calm down – and that will make it easier for the Bank of England to justify further interest rate cuts.
• Deloitte partners trousered £1m each, on average, for the fourth year running despite a slowdown in revenue growth. This loss in momentum was down to poor demand for advisory  services but I think that deal flow has been picking up and any recent “downsizing” has been an exercise in clearing the decks before the next “rush” (which is likely to happen from next year IMO, geopolitical events permitting). It was interesting to note that Barclays said this week that it would be focusing on advisory and equity capital markets (which says to me that they think IPO activity is going to heat up).

IN INVESTMENT TRENDS…

• Apollo said that it wants to double assets by 2029 as its private capital business continues to grow. This sounds great but I really think that the regulators need to get involved because I don’t think it’s fair (or safe) to let this lot grow unfettered while banks have their hands tied behind their backs. Also, firms like Apollo also borrow from banks, so if they go down because they’re taking on too much risk the banks will go down as well…

IN NEWS ON DEMAND…

• Auto sales in the US weakened slightly in Q3 versus the same period a year ago and still fall short of pre-pandemic levels while European carmakers brace themselves for more tough times ahead. There’s a major contrast in EV sentiment in China versus what’s going on everywhere else! NIO just got a $1.9bn investment from its parent and a group of Chinese investors while the latest figures from the Department of Transport have shown that EV demand has now hit a four-year low.

IN NEWS ON EVs…

• Tesla saw a rebound in Q3 deliveries and they were roughly in line with market expectations. Delivery numbers were boosted by strong performance in China – but total deliveries so far this year lagged the numbers we saw over the same time period last year.
• The SMMT published an open letter appealing to the government to cut VAT on new EVs and public charging points while Ford UK urged them to put EV sales targets on pause for a year to give time for demand to catch up. Car manufacturers are highly unlikely to hit EV targets at the moment – and they are going to have to pay huge fines as a result.
• Stellantis announced a profit warning and cut profit estimates as it continues to struggle with the EV transition – and, as if that wasn’t bad enough, it also had to announce a recall of 200,000 plug-in hybrids following reports of fires in vehicles that were parked with the ignition turned off (something we saw recently in South Korea)! Meanwhile, the production freeze for the electric Fiat 500 has been extended due to poor demand.

IN CAR SECURITY NEWS…

• Especially since the Americans have been calling Chinese in-car tech into question we’ve seen debate spark up again as to whether it really is a security risk or not. Chinese in-car tech is at the cutting edge and it seems that connected cars do pose real security risks but then again I guess that’s the price we pay for convenience.

AND IN INDIVIDUAL COMPANY NEWS…

• Aston Martin announced yet another profit warning. The company’s burned through five CEOs in five years, so let’s see whether the latest one will be given time to turn the company around. The company is due to report its Q3 numbers on the morning of the Budget!

IN CONSUMER TRENDS…

• India looks like it could be a major growth market for posh Swiss watches! While Swiss watch exports fell overall this year, exports to India actually increased by 20% in value, year-on-year, in the first seven months of 2024. Some of this will be due to an agreement to scale back customs duties on Swiss watches over the next seven years, but there’s also a major longer-term driver in the form of the youthful population and growing middle classes.
• A European consumer recovery looks imminent thanks to falling inflation, rising real wage levels, high levels of savings and recovering consumer confidence. Interest rates probably need to fall a bit more from current levels to unleash this recovery though.
• Weight-loss drugs appear to be changing the appearance of gyms! Until now, cardio machines have been taking over, but now free weights, medicine balls and other bits are making a comeback as weight-loss drug-takers try to mitigate side effects of the drugs which also promote muscle loss as well as fat loss! This sounds like great news for gyms (= more members) – but particularly makers of gym equipment (kitting out those gyms!), no?

IN RETAIL TRENDS…

• UK shop prices are falling at their fastest rate since 2021. Clothing and furniture led the way in price deflation and were enough to drown out the uptick in fresh food inflation.
• Luxury brands are pushing $1,000 “micro” handbags in a bid to tempt middle-income shoppers back. This segment of customers may not buy the most expensive items, but they do buy big volumes as a collective group.

IN RETAILER NEWS…

• LVMH garnered a lot of column inches this week! It effectively bought a stake in Moncler by buying a 10% stake in Double R, an investment vehicle controlled by Moncler’s chief exec and sold the streetwear brand Off-White to Bluestar Alliance. We then heard that LVMH signed a 10-year sponsorship deal with F1 starting from next year. This is going to be epic for LVMH as this deal will give it a broad platform to display its wares.
• Frasers Group made a cheeky £83m takeover bid for struggling luxury handbag maker Mulberry. It already has a 37% stake, but it needs to convince the biggest shareholder, Challice, otherwise it’s just going to fail. Unsurprisingly, the bid was rejected.
• Amazon is going to increase the number of ads on Prime Video from next year in order to made more money from its ad-funded streaming services. Amazon’s subscriber numbers have been pretty steady since it introduced advertising to its Prime Video platform earlier this year – and I guess that this has emboldened the company to do more.
• AO World agreed to buy musicMagpie for £10m. God knows why 🤣. This company has been an absolute turkey! It floated in 2021 at a £200m+ valuation. Talk about a comedown!
• IN SUPERMARKETS, Tesco raised its profit forecasts and is making bullish noises about Christmas. I interpret this as another sign that the government’s message of doom-and-gloom is 🐂💩. Meanwhile Booths, aka the “Waitrose of the north”, managed to narrow annual losses after sales breached the £300m market for the first time in its history. Meanwhile, the CEO of Sainsbury’s had a moan about the lack of clarity surrounding Rachel Reeves’s proposed tax rises, saying that it is prompting caution among shoppers, particularly regarding big-ticket items.
• IN APPAREL – JD Sports said that it was on track to hit its annual profit targets despite a slowdown in demand for Nike products. Talking of which, Nike posted its biggest drop in sales since the pandemic and it also spooked investors by withdrawing its scheduled annual revenue forecast announcement and postponing its investor day. The new CEO has clearly got a lot to sort out – but thankfully he is a long-time returning veteran, so you would have thought he will be able to get back up to speed relatively quickly.
• M&S is thinking about taking over a massive distribution warehouse in the centre of England in order as it continues to see more success in online sales of fashion and homeware. The fact that it is even considering such a move would suggest that things are going pretty well and that it’s confident about the outlook!

IN LEISURE NEWS…

• Greggs announced an uncharacteristic slowdown in sales over Q3 but regulars will be relieved to hear that it had “no plans to put up prices for this year”. The company left full-year numbers untouched, which suggests that they think they can pull it all back in the colder months!
• A new law governing tips came into force this week. Basically it forces restaurants/hospitality venues to give 100% of the tips to the staff, however they are paid. Good news for staff, but perhaps this adds to the headaches for the business owners who have already been grappling with the impact of the higher minimum wage. This could mean that some venues increase prices to customers.
• Guinness World Records announced that it’s going to open a London entertainment venue in 2026 which will offer over 60 games and competitions that will encourage kids and adults to break records! Sounds like fun!

IN AI NEWS…

• OpenAI reckons that AI agents will become mainstream by 2025 as tech groups, including Google and Apple, continue to develop them for their respective users.
• DeepMind and BioNTech are now building AI lab assistants that can help planning experiments and more accurately predict their outcomes – which can all help to speed up drug development.
• The new minister for AI and digital government said that she expects a resolution to the copyright disputes between British AI companies and creative industries “by the end of the year” either via an amendment to existing laws or the introduction of new legislation.
• The CEO of SAP warned the EU against over-regulating AI, saying that this could put the block at a disadvantage to the US. The same arguments were trotted out by financial institutions for years (that over-regulation would stifle innovation), but then the financial crash happened. After that, a ton of rules came into force – but innovation is still continuing and banks are still making loads of money so being pre-emptive may not actually be all that bad!
• OpenAI managed to raise $6.6bn at its latest funding round but it still has to address issues such as governance, its structure and its business model. It’s interesting to note that, in order to get a slice of the action, investors in OpenAI had to promise that they wouldn’t fund rival start-ups. They could do this because the funding round was hugely over-subscribed.

• IN REAL ESTATE NEWS – Nationwide figures showed that UK house prices hit their highest annual growth since 2022 while Zoopla figures showed that UK house sales in September rose at their fastest rate for three years. I would have thought that this momentum is likely to continue given the higher multiples of salary being accepted by lenders when calculating the size of loans.
• An epic legal battle between insurers and owners of $10bn-worth of aircraft stranded in Russia after its invasion of Ukraine started this week in the High Court. Get the popcorn ready – this is going to be a big case!
• Diageo decided to scrap its proposed sale of Pimm’s as demand for the summer mixer gets its 🍑 kicked by Italian rival Aperol. I think that Pimm’s needs a marketing revamp, perhaps more of an effort to make it appeal more internationally – and then the sale can be revisited.

My favourite “AND FINALLY” video this week was the one with the epic street performer! This guy is amazing!