Watson’s Weekly 08-06-2024

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 of shock election results, when Nvidia became bigger than Apple and when Shein caused even more of a kerfuffle…

• IN ELECTIONS NEWS – it was all looking good for a third term for the current PM, but then Modi’s party lost its majority and had to get backing from other parties to form a new government. His lack of majority may take the edge off some of his more controversial policies. Claudia Sheinbaum became Mexico’s first female president but faces tough challenges when she takes over from incumbent AMLO on October 1st. In South Africa, the ruling ANC party just about stayed in power but has had to resort to appealing to rival parties to form a “government of national unity”. Former president Jacob Zuma’s recently-formed party was accused of being bankrolled by the Russians but no proof was provided and it was obviously denied.
• IN THE US – Biden has been trying to capitalise on Trump’s conviction while Trump himself returned to TikTok, the app he tried to ban towards of the end of his term in office, as both candidates vie for voters’ attention.
• IN CHINA – the latest Caixin services sector PMI came in at the top end of analyst estimates, showing that China’s economy is gathering pace.
• IN CANADA – the Bank of Canada cut its main interest rate from 5% to 4.75%, becoming the first G7 central bank to cut interest rates this cycle. This had been widely expected in the market.
• IN EUROPE – the ECB cut interest rates from 4% to 3.75% in its first cut for five years. It had also been widely expected. Germany had an unexpected rise in unemployment and Turkey’s constitutional court struck down President Erdoğan’s decree allowing him to sack central bank governors (he’s been through five already in the last five years!). Inflation is still 75% though!
• IN THE UK – the Conservatives and Labour outlined policies on immigration and tax among other policies designed to appeal to middle Britain while Nigel Farage ruffled Conservative feathers by returning to politics as leader of the Reform party, something that might split the Conservative vote. In the meantime, councils are selling off assets as they face massive budget shortfalls, something that the next government is going to have to deal with.

IN MARKETS NEWS…

• The LSE wants to have a higher profile as part of efforts to make the exchange more attractive for flotations. Although the current narrative seems to be that New York is more attractive than London, the valuations aren’t all necessarily that different.
• The NYSE had a technical glitch this week, but it got sorted fairly quickly, while Texas put forward plans to launch a rival exchange – something that got a lukewarm reception.
• Investors continue to pull money out of ESG funds to the extent that, according to stats from Barclays, this is now the first year that fund flows for ESG have been net negative!

IN CLIMATE/ENERGY-RELATED NEWS…

• La Niña is going to be hitting the world later this year, following the El Niño warming phase. This is going to mess further with weather patterns around the world – so expect more volatility in commodity prices as harvests are affected.
• IN ENERGY – Britain will be relying more than ever on imported power for the next few years until we get our nuclear power and renewables plans sorted – but in the meantime we’ll be relying on our aging existing fleet of power stations. We could perhaps learn from the Americans who are rolling out and using more battery storage facilities that help to even out the provision of electricity.

IN COMMODITIES NEWS…

• IN OIL – the consolidation in US shale companies is having a major impact on the whole oil and gas industry – for instance, oil prices actually fell despite OPEC+ members committing to keep current production quotas intact. Meanwhile, uncertainty continues in the North Sea as companies are unwilling to commit to new projects until they know who’s going to be in Number 10 and what policies they are going to be implementing (particularly regarding windfall taxes).
• IN GAS – European gas prices jumped suddenly after an outage at a gas processing plant in Norway. China is playing hardball in negotiations with Russia on a new gas pipeline deal as it demands much less gas and at a much lower price than the Russians had been hoping for. Russia really is the junior partner in this relationship and China is taking full advantage.

IN CRYPTO NEWS…

• Robinhood has pushed on with an acquisition in the crypto space, Bitstamp, despite warnings from the SEC on its digital assets business. This will be Robinhood’s biggest acquisition to date and will really broaden its business in crypto.

IN BUSINESS TRENDS NEWS…

• Container shipping giant Maersk’s optimism continues to increase as it raised its full year guidance for the second time in just over a month thanks to higher global freight rates powered by ongoing disruption in the Red Sea. This could be seen as a positive because Maersk is often seen as a bellwether for global trade – but I’d temper this with the fact that the Red Sea is holding things up and there will be a lot more shipping capacity coming online in the near future, which should mean that freight rates will go weaker.
• Things are looking up for British manufacturing, according to the latest S&P Global/CIPS manufacturing PMI as output has been growing at its fastest pace since July 2022.
• Private healthcare demand has hit a record high in the UK, according to the Private Healthcare Information Network (PHIN) – but I don’t think this is surprising given NHS waiting lists!
• Beverage companies including Diageo, Campari, Pernod Ricard and Rémy Cointreau are all seeing their share prices trade at record lows because of various difficulties of stocking in Latin America and tariffs in China but I’d also imagine that changing drinking trends among young people is also a factor in this.

IN CONSUMER TRENDS…

• Pay growth in Japan jumped to its highest level since 1994! This is great news, but we’ll have to just wait and see whether consumption will now pick up…
• In the UK, a survey by the Bank of England showed that wages and price growth are going to slow down – which should make it easier for the Bank of England to justify cutting interest rates this summer as it would imply that inflationary pressures are receding.

IN AI NEWS…

• Nvidia became more valuable than Apple this week to become the world’s second most valuable company behind Microsoft! This just goes to show how important Nvidia is in the AI boom. Nvidia also announced its latest generation of chips not long after the last one! Nvidia’s success is boosting the fortunes of CoreWeave, which rents out servers for specialist use.
• IN THE MIDDLE EAST – Saudi Aramco’s venture capital arm put some money into the latest $400m investment round in Chinese AI start-up Zhipu AI, showing that it is willing to spread its bets as far as AI is concerned and not just back American companies. On the other hand, the UAE is keen to deepen the relationship with the Americans on AI, implying that the recent deal with Microsoft was only the beginning.
• IN THE AI vs JOBS DEBATE – JP Morgan is expanding the use of a generative AI tool designed to highlight controversial investment decisions for review by fund managers. Meanwhile, on the “sell-side”, there has been a recent draft paper which shows that AI outperformed financial analysts on predicting the direction of future earnings quite comfortably while wealth manager St James’s Place has started to use AI to help identify and assist customers by identifying “any kind of intonation or any kind of language…that may trigger that someone is a vulnerable customer”. Meanwhile, the rising use of chatbots giving full answers to questions is cutting into search engine volumes, which puts companies that generate ad revenue from search engines in a vulnerable position. Later in the week, we saw that the US Department of Justice and the Federal Trade Commission are to launch an inquiry the roles of Microsoft, OpenAI and Nvidia in the AI industry and whether they have been anti-competitive.

IN MEDIA NEWS…

• Spotify saw its share price jump as it doubled down on profitability rather than growth, something that chimed with investors.
• Universal is planning to build one of the biggest theme parks in the world – in the UK! It has bought a 500 acre site just south of Bedford, but a final decision as to whether it will go ahead is due by the end of the year.

IN IPO NEWS…

• The LSE’s pipeline of IPOs is looking increasingly healthy although it’s already making quite a lot of money from “follow-on” transactions. Shein is getting closer to a London IPO although there are detractors given its patchy record.
• It was interesting to see some stats on how London stock market floats that happened in 2021 are doing now – generally not well! The best performer was Darktrace (+135%) and the worst was Dr Martens (-76%).

IN M&A NEWS…

• Medical tech company Becton Dickinson added another acquisition to their string of acquisitions by buying Edwards Lifesciences, a company that specialises in advanced patient monitoring using AI algos, for $4.2bn in cash.
• The president of Paramount Global, Shari Redstone, is keeping the door open for other potential buyers as she is unhappy with the offer from Skydance.

IN DRIVERLESS NEWS…

• British driverless car company Wayve is planning to unleash its cars on the streets of San Francisco, challenging the likes of Tesla and Waymo. This might help driverless get back on track after a series of missteps by the local incumbents.

IN EV-RELATED NEWS…

• Stellantis and Mercedes-Benz have decided to postpone plans to make EV battery gigafactories in Germany and Italy. This isn’t surprising given anaemic demand for EVs in Europe at the moment.
• EV charging in apartment blocks got a £35m boost from the government’s Charging Infrastructure Investment Fund as it put the money into Hertfordshire-based start-up Energy Park, which specialises in this area.
• There’s mixed news for EV sales depending where you go but China saw strong sales in May while manufacturers are warning that current discounts on EV prices are unsustainable. That being said, overall car sales continue to rise – and they are being powered by the ongoing popularity of hybrids!

IN “TRAD” CAR NEWS…

• A Japanese government investigation has unearthed dodgy testing data at five of Japan’s leading carmakers, including Toyota and Honda. Some vehicle shipments have been suspended as a result. This may well clip the wings of Toyota’s hybrid-led renaissance.

• IN REAL ESTATE NEWS – although commercial property values have had a tough time of it in the last few years LondonMetric’s focus on warehouses has paid off as a warehouse tenant that took out a lease in 2019 and renewed it last year now has to pay 40% more! Meanwhile, in residential, the latest S&P Global PMI for the construction industry reflected growth in May for the first time since the whole mini-budget debacle! US PE firm Blackstone is looking at pushing into the UK rental property market as it just agreed a deal with Vistry to buy around 1,750 new homes for rental purposes. Meanwhile, Zoopla stats say that rental growth is slowing down to its lowest level in 30 months!
• IN RETAIL NEWS – Zara owner Inditex unveiled a strong trading update for Q2 despite poor weather across Europe. It is on track for double-digit growth for the period. BRC figures showed that retail sales in the UK stayed pretty downbeat in the year-to-May thanks to poor weather and ongoing consumer caution in terms of spending. Over in the US, discount retailer Dollar Tree is thinking of selling the Family Dollar chain almost ten years after it bought it! It is trying to streamline operations but you do wonder how the whole discount sector will do when economies start firing up again…
• IN FINANCIALS NEWS – billionaire investor Bill Ackman just sold a 10% stake in his hedge fund Pershing Square. It’s thought the fund will IPO next year. Meanwhile, hedge fund short sellers are getting burned by the recent flurry of UK takeover bids as their bets are blowing up in their faces because takeover target share prices suddenly boom on bids and/or bid rumours (their short positions in these companies mean that they are betting that their share prices will go down – not up!). Private equity funds are warning that there may be lower returns for the next few years as they try to sell out of assets they’ve bought over the pandemic.
• The Monsanto payout for the ongoing legal battle surrounding its weedkiller Roundup has been slashed to $400m from $2.25bn, something that its parent company Bayer will no doubt be very pleased with. Monsanto said it will be pushing for further reductions in the Superior Court.

My favourite “AND FINALLY” video this week was Uncle Roger’s latest roast of a Jamie Oliver recipe! Honestly, Jamie – what is going on??!?!