Watson’s Weekly 06-05-2023

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 a week of interest rate rises, continued banking panic and AI contemplation…

• IN THE US – the Federal Reserve increased interest rates by 0.25% to 5.25%, a 16-year high! Fed chief Jay Powell hinted that the peak of interest rates was in sight…
• IN EUROPE – the ECB raised interest rates by 0.25% to 3.25%, saying that there’d be more to come. Economists are forecasting two more 0.25% moves by July, which would mean that it would equal the peak of 3.75% it reached in 2001!
• IN MARKETS NEWS – the FCA proposed changes to London Stock Exchange listing rules in an attempt to make it more attractive as a listing destination as it has been losing out to New York in particular in the last few years.

IN COMMODITIES NEWS…

• Gas reserves in France have fallen to the lowest levels in Europe thanks to pension age protests. Gas reserves are running at just 28% of capacity now versus an average of 56% across Europe) because strikes have forced the French to dip into their reserves already.
• BP unveiled “heinous” profits and Shell announced record Q1 profits! They were both particularly strong in oil and gas trading, outperforming the biggest private energy traders last year.

IN BUSINESS TRENDS…

• Although it announced better-than-expected Q1 results, Maersk’s glory days are over as revenues have slowed right down. Comparisons will be tricky given that it made more money in the last three years than it did in the last sixty! The main issue will be an imminent increase in capacity which it thinks is unlikely to be met by a similar rise in demand. Maersk is often seen as a bellwether of world commerce, so the fact it seems to be slowing down isn’t great.
• Defence spending continues to increase across the board. However, Asian defence companies often get overlooked but Korean defence companies such as Hyundai Rotem, KAI, LIG Next and Hanwha Aerospace should continue to see strong exports as long as the Ukraine war continues and the threat of China/Taiwan exists.
• UK SMEs feel more confident, according to the latest data from the Federation of Small Businesses which shows that confidence has made a comeback in Q1 after a decidedly sketchy Q4 in 2022. On the other hand, UK manufacturing is in a rut according to the latest CIPS and S&P Global Manufacturing PMI due to weaker demand from the US, China and Europe.
• Chinese e-commerce giant Pinduoduo moved its HQ from Shanghai to Dublin in an effort to get around any potential US-China sanctions. I wonder whether more companies will do this (Pinduoduo isn’t the first to do this, but others may decide to emulate it).

IN EMPLOYMENT TRENDS…

• Eurozone jobless numbers fell to their lowest level in Q1 since the launch of the single currency in 2000!
• The Legal Services Board is looking into the alleged misuse of NDAs in England and Wales, particularly as applied to whistleblowers. The LSB is expected to reach a conclusion on this later on in the year.
• Grads are struggling with teamwork, according to Deloitte and PwC. Those who were badly affected by lockdown are now getting extra coaching on teamwork and communication skills. It’s likely that this is much more widespread among the cohort whose education was disrupted by Covid.

IN CONSUMER TRENDS…

• Chinese are spending more on tourism, topping pre-pandemic levels for the first time and they’re also buying more cars from domestic carmakers these days than they used to.
• Consumers generally are spending money on luxury cars like Porsches and Aston Martins and booze from AB InBev (although European shoppers are pushing back on price rises).
• There seems to be a definite trend of consumers spending more on travelling as the UK tourism sector has powered the services sector to its steepest growth rate in a year, according to the latest CIPS/S&P Global survey – with staycations showing strong performance –  Ryanair had a very strong April and a decent showing by Trainline reflected a general desire to get around!
• In terms of more “mundane” trends, the latest ONS data laid bare incredibly high food prices but consumers continued to spend on clothes at Next and keeping fit by subscribing to Peloton (although the momentum here is still a work in progress). They are also spending more on houses as the latest Bank of England figures show that UK mortgage approvals have hit a five-month high!

OVERALL…

• European carmakers are pouring money into China, according to US research group Rhodium, as they try to claw back market share from domestic makers. Thailand is also seeing a surge in inward investment from car and battery makers.
• Ford managed to reverse the previous-year’s loss as its profits rebounded in Q1. It left full year numbers unchanged and announced another price cut to its Mustang Mach-E.
• US electric truck maker Lordstown Motors is in trouble again as major backer Foxconn is threatening to pull its support.

IN BANKS NEWS…

• JP Morgan bought the majority of First Republic and there were specific reasons why it needed to be bailed out. However, the rescue failed to calm investor jitters which then manifested themselves in the sell-off of other banks PacWest and Western Alliance which then got so bad that shares in both were suspended.
• Elsewhere, HSBC unveiled strong results as it managed to triple its profits in Q1 – but this didn’t stop calls by activist shareholder Ping An for a break-up of the company to spin-off its Asia business. Lloyds Bank also announced better-than-expected Q1 profits.

IN OTHER FINANCIALS…

• Hindenburg Research published a hugely damaging report on Icahn Enterprises, the publicly listed fund  of activist investor Carl Icahn. It pointed out ponzi-style elements in its structure. Icahn Enterprises got sold off throughout the week and I was surprised by what seemed to be a less robust defence than I would have expected from a man known for his ability to dish it out to companies.

IN AI NEWS…

• Tech execs from prominent AI companies were summoned to meet vice-president Kamala Harris this week to discuss AI risks and its future development. Execs from companies such as OpenAI, Google and Microsoft went along and it was made all the more pertinent as Geoffrey Hinton, seen by many as the godfather of AI, quit Google in order to be able to speak more freely about his creation. Even Microsoft expressed concerns that AI could do “real damage” while Google continued to enhance its AI capabilities with a newly streamlined AI unit.
• The UK’s Competition and Markets Authority launched a review into the AI market as it aims to become the world’s third pillar of tech policing.
• Meanwhile, edtech companies took an AI-inspired hit on news that online study guide specialist Chegg announced a revenue warning due to students using ChatGPT instead. Other edtech companies including Pearson, Duolingo and Udemy saw their share prices weaken although those with significant IP could potentially benefit from AI.
• Amnesty caused a stir by publishing an image from 2021 Colombian protests using AI. Whilst there were legitimate reasons for doing so on this particular occasion (to protect the subjects’ identity), it goes to show how AI can be abused by those pushing false information – and it also offers opportunity for news outlets to save costs by using AI-generated images rather than sending photographers into warzones…
• New AI-powered software, called Lexis+, is being trialled by law firms including Baker McKenzie, Reed Smith and Foley & Lardner. It will help lawyers to research, summarise documents and potentially draft letters. LexisNexis was used to train it, so this should hopefully reduce any potential “hallucinations”.

ELSEWHERE…

• Apple’s targeting your car’s dashboard with Apple CarPlay and some car manufacturers are getting so concerned about it that they’re desperately trying to install their own infotainment systems. Even if Apple made a car, it is thought they’d be unlikely to achieve anywhere like the margins they get from their other products, so targeting the in-car experience sounds like a good idea. Separately, it seems that refurbished iPhones are a big hit in India. It looks like Apple is making decent progress in what could be a massive market!
• It was a bad week for Meta as it is now facing a ban from the FTC for monetising the data that it collects from young users, following allegations that it has violated a 2020 privacy order. It has also been advised by the British bank TSB to implement measures that will stop customers becoming victims of fraud after rising instances of scams on Facebook, WhatsApp and Instagram.
• Twitter rolled out a paywall so that developers will now have to pay to access its user data. It is also interesting to note that a new social media platform, called Bluesky, is emerging as a Twitter rival. It even has Twitter’s co-founder, Jack Dorsey, on the board. It is very small at this stage, though.
• TikTok is launching a new ad product, called “Pulse Premiere”, for publishers and is giving them a chunky 50% cut of revenues. This will enable publishers to sell ads next to their posts.
• Meanwhile, the UK government is watering down proposals that would force tech groups to reimburse victims of fraudulent content due to concerns about the damaging effect it could have on the industry. However, it will try to make the industry be more proactive about online fraud.
• Qualcomm unveiled a downbeat sales outlook, adding to the overall gloom spread by fellow semiconductor companies. One of the reasons behind the weakness was that demand for mobile handsets had fallen than more than they had predicted.
• Shopify announced that it would lay off 20% of its workforce after giving up on its bid to build a logistics business. Investors were relieved by the news and the share price shot up by 24%!

• Japanese pharmaceutical company Astellas proposed its biggest-ever acquisition of US biotech group Iveric Bio for a chunky $5.9bn.
• Eli Lilly announced that it was seeking approval for its Alzheimer drug, which it says can slow the onset of the disease if it is diagnosed early!

• UK house prices rose last month for the first time since August last year, according to the latest Nationwide figures. It caught everyone by surprise!
• Shops got a nice little boost in the weekend before the coronation, according to Springboard, as footfall increased.

My favourite “alternative” story this week was one about a pub’s innovative idea to bring the punters in: Boozer offering bottomless crisp buffet with 30 different flavours to choose from (The Mirror, Ariane Sohrabi-Shiraz). A shrewd idea as I’d imagine they’d still make money on selling the booze to go with it!