Watson’s Weekly 10-02-2024

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 the Xi/Putin love-in, Arrival departing and Arm’s roaring return…

• IN CHINA  – consumer prices fell at their fastest rate for 15 years in January. This was the fourth consecutive month of decline. Investors are now wondering whether Chinese deflation will spread globally as production overcapacity leads to Chinese manufacturers flooding non-domestic markets with cheap product. China’s stock market got a bump up on hopes that Xi was going to unveil some kind of stimulus but then we heard that the Communist party boss and chairman of its securities regulator got booted, without giving any reasons.
• IN RUSSIA – Putin’s main anti-war opponent, Boris Nadezhdin, was banned from running against Vlad in next month’s presidential elections in a ruling by the Central Election Commission. Meanwhile, Russia’s president had a call with President Xi that seemed to cement their continued stance against the US.
• IN EUROPE – Brussels gave in to farmer protests across Europe and slashed environmental targets. Farmers have been protesting in countries including Germany, France, Spain, Belgium, Poland and Romania and the concerns have been that they will switch their votes to far-right parties in June. EU President Ursula Von der Leyen wants to get re-elected this summer and needs the farmers’ votes! In the Netherlands, Geert Wilders’ bid to become Dutch PM was dealt a blow as a potential coalition member walked out of talks earlier this week because he was shocked by budget shortfalls that would occur because of Wilders’ spending plans. He’s having problems at the moment but if Wilders does manage to form a government, he’ll be the first far-right leader in the EU to do so in modern times.
• IN JAPAN – the Bank of Japan is considering lifting interest rates from the -0.1% they’ve been at since 2016. Some are saying that they could be lifted as soon as March thanks to growing momentum for wage increases and rising service sector prices.
• IN THE UK – jobs data from the ONS is going to be a bit tricky for the next six months as it’s using a new official survey after the one they’d been using had become useless because of the lack of respondents. This is going to make it difficult for the Bank of England to make interest rate decisions at a crucial time.

IN COMMODITIES NEWS…

• IN OIL – BP saw its profits halve but results came in better than expected while the company still faces criticism for reining in its green goals. Elsewhere, the would-be $57bn mega-merger of Woodside and Santos collapsed and ExxonMobil’s fight against ESG investors deepens, although the chief exec of Norway’s sovereign wealth fund criticised it for being overly “aggressive”.
• IN LNG – Biden’s decision to put approvals for new LNG export terminals on hold will please the environmentalists but not companies like Venture Global and Golden Pass who develop these plants – but US industry could benefit from cheaper natural gas because exports would go down. It could also benefit Russian LNG suppliers – which means that Biden is basically helping Russian gas demand!
• IN COPPER – A Bill Gates-backed mining company, called KoBold Metals, said that it had discovered Zambia’s biggest copper deposit in a century – and it could among the world’s top three high-grade copper mines! It used AI to find it and the discovery could lessen the world’s reliance on China for the material which is used in power transmission lines, EVs and wind turbines.

IN ENERGY NEWS…

• IN NUCLEAR NEWS – researchers at the Joint European Torus facility outside Oxford beat their previous record of power generation by nuclear fusion, which is a real step forward. One of the engineers involved in the country’s efforts to develop nuclear fusion power generation says that the tech will be viable by the early 2040s.
• IN RENEWABLES NEWS – Danish offshore wind developer Ørsted said that it will suspend its dividend, cut its targets for renewables, reduce headcount by almost 10% and withdraw from offshore wind markets in Norway, Spain and Portugal after a number of years of expansion. Costs have skyrocketed and many windfarm companies have been tied into agreements where raw material prices were a lot lower.

IN BUSINESS AND EMPLOYMENT TRENDS NEWS…

• IN BUSINESS TRENDS – Mexico has overtaken China to become America’s #1 exporter for the first time in 20 years! Also, it was interesting to hear that shipping container giant Maersk has decided to suspend a big share buyback and dividend pay out after warning that it would fall into loss this year. What a turnaround!
• IN EMPLOYMENT TRENDS – the latest data from the REC-KPMG report shows that wage growth has hit its slowest pace in almost three years. This should factor into the Bank of England’s decision on when to cut interest rates.

IN ELECTRIC VEHICLE NEWS…

• China’s Ministry of Commerce is trying to help its EV manufacturers expand overseas by doing things like working with shipping companies to integrate warehousing and logistics as well as encouraging banks to provide financial support to EV supply chain companies. Perhaps they can smell blood as many western EV makers are looking a bit lacklustre at the moment!
• Ford announced that it will be launching range of cheapo EVs to combat the Chinese onslaught and convince mainstream buyers to to make the switch to electric. Although I think that affordable EVs is the way to go I think that there is a risk that if they get too popular, charging networks (and, indeed power grids themselves) could prove to be a limiting factor – and this could have a significant detrimental effect on subsequent EV adoption because people may just give up and try again nearer 2035.
• Hertz decided to suspend plans to buy a load of Polestar vehicles this year after resale values collapsed last year! This is a major policy U-turn for the hire company. On the subject of used EV sales, the SMMT’s latest figures said that sales of used EVs in the UK doubled last year as new models came to the market and prices fell steeply.
• British electric van maker Arrival went into administration after burning through $1.5bn without ever selling a vehicle! Its 2021 NASDAQ flotation in 2021 was the biggest ever for a British company but its share price has evaporated by 99.8% since its peak valuation of £10bn as it drowned in debt.

IN OTHER AUTOMOTIVE NEWS…

• Toyota just cut its forecasts for EV sales as demand for hybrids boomed.
• Aston Martin is looking for its fourth CEO in four years as the current “ex-Ferrari” man left “by mutual consent”.
• A Waymo driverless car hit a cyclist this week. The cyclist was OK but this is yet another setback for driverless and the incident is going to be investigated by the police and California’s Department of Motor Vehicles.
• Parisians voted to impose higher SUV parking fees in the capital, with charges tripling in some areas! Charges will be payable for vehicles of over 2 tonnes – and that includes electric SUVs as well! Will this be adopted in other cities??

OVERALL IN THE UK…

• Retail sales grew by a sluggish 1.2% year-on-year in January thanks to weaker consumer demand, according to the latest figures from the BRC and KPMG.
• The Office for Budget Responsibility is considering the potential reversal of the tourist VAT tax that was implemented by Sunak when he was chancellor in 2020. This is what a lot of retailers (particularly luxury goods ones) have been pushing for…

IN LUXURY GOODS NEWS…

• Gucci owner Kering saw sales slide in Q4 as Gucci continues to underperform relative to some other luxury marques although sales had improved in North American and Asia-Pacific markets over the quarter.
• Farfetch looks like it’s heading for liquidation as creditors didn’t like last week’s $500m rescue deal from South Korean retailer Coupang and said that it had been rushed into. The luxury online platform’s valuation has fallen by 99% from its high in 2021!

IN CONSUMER GOODS NEWS…

• L’Oréal thinks that price rises will slow down this year to pre-pandemic levels after three years of relentless rises. Results came in below market expectations but the company sounded fairly upbeat about market prospects.
• Sephora has had a successful relaunch in the UK after leaving us in 2005. It was relaunched last year and its performance here has been very strong. It said that it will be opening more stores.

IN APPAREL RETAIL…

• Hobbs is now looking at opening in better locations having completed a raft of closures both in the UK and abroad. This looks like a show of confidence, no?
• TikTok is putting pressure on apparel makers by being largely responsible for speeding up fashion trends. This isn’t great for Uniqlo, which is slow to get from design to shelf, is better for Zara-owner Inditex, which is quicker, but it is particularly suited to Shein’s incredible turnaround that takes a matter of days! Talking about Shein, it continues to battle counterfeiting lawsuits ahead of its inevitable IPO and I would reiterate that I think that litigation risk is going to be a major problem for the fast-fashion company for quite some time to come. Meanwhile, Frasers Group increased its shareholding in Boohoo from 21.5% to 22.1%.

IN GROCERY RETAIL…

• The latest numbers from NIQ showed that M&S’s sales growth is outpacing Aldi’s to the extent that it is now the UK’s second fastest growing supermarket! Lidl is the only one ahead of it! Momentum really is with M&S at the moment…
• Sainsbury’s said it’s now producing a “food-first” agenda after poor performances by Argos and that it will be cutting an additional £1bn in costs over the next three years along with implementing a chunky £200m share buyback. It’s going to add another 10% of space for food and cut the footprint for clothing and general merchandising.

IN LEISURE NEWS…

• IN RESTAURANTS – major players like McDonald’s, Pizza Hut and Starbucks have seen sales suffer because they have been boycotted for taking sides in the war in the Middle East. Back home, Pret abandoned its last veggie-only stores due to lack of interest. The concept lasted for eight years.
• IN TRAVEL-RELATED NEWS – European airlines are bracing for the impact of record passenger numbers this coming summer despite the ongoing tricky economic backdrop and high ticket prices! Ryanair, easyJet and Wizz Air have all making positive noises about strong summer demand and rising prices at their most recent results announcements. Meanwhile, Boeing has found another problem with its 737 MAX fuselages. This could delay deliveries in the short term but it did say that 737s could still fly! What a nightmare. Now Emirates Airlines is sending in its own engineers to oversee Boeing’s production lines due to mounting concerns over its manufacturing quality! The nightmare continues…

IN AI NEWS…

• Microsoft did a deal with tech start-up Semafor to use its AI chatbot to put together news stories at a time when it is also facing a multi-billion dollar lawsuit from the New York Times. Semafor will post a breaking news feed called “Signals” that will not only offer breaking news – but also analysis on major stories. Signals will be written by journalists powered by AI for research.
• Google announced the launch of Gemini, its latest generative AI system, as it tries to catch up with Microsoft and OpenAI in the race for AI supremacy. Its most advanced model, Gemini Ultra 1.0, will be offered as a chatbot and integrated into its other productivity tools like Gmail, Docs and Sheets via a $20 a month subscription plan. Google will be renaming all of its AI products, including its Bard chatbot, as “Gemini” as part of a corporate rebrand to unify all of its offerings.

IN CHIPS NEWS…

• China’s biggest chip maker, SMIC, now has new chip production lines in Shanghai to mass-produce chips designed by Huawei. Some experts reckon that the two could come up with next-gen smartphone processors as early as this year.
• TSMC announced that it would add a second chip factory in southern Japan, raising its investment there to over $20bn as it seeks to minimise geopolitical risks.
• Arm’s share price jumped by over 50% in reaction to it increasing its profit and revenue forecasts thanks to continued demand for AI tech. It is seeing more demand from companies wanting to licence its designs to run AI but it also decided to raise forecasts because it expects to see a recovery in sales for smartphones – an area where it has massive market share!

IN OTHER TECH NEWS…

• Amazon announced that it had done a real with the UK’s biggest publisher, Reach, to access customer data for use in targeting online ads as it braces itself for Google’s move to kill off “cookies”. Very soon, internet users will be unidentifiable for advertisers as cookies disappear.
• Snap’s quarterly revenues fell short of market expectations due to intense competition and pickier spending by advertisers who preferred to go with its bigger rivals such as Meta and Alphabet.
• Yandex – famous for being known previously as “Russia’s Google” – has agreed to sell its operations in Russia in a cash-and-shares deal to a consortium of Russian investors. The remaining bit of the business will be rebranded.

IN BANKS NEWS…

• Italian bank UniCredit announced that it would be returning €8.6bn – its entire profit of 2023 – to shareholders as it had benefited from the high interest rate environment over last year. Its Q4 profits came in at over three times analysts’ estimates!
• UBS announced that it would be seeking out more cost-cuts as it continues to integrate with Credit Suisse as it announced a Q4 loss that actually wasn’t as bad as the market had been expecting.

IN OTHER FINANCIALS NEWS…

• Spread-betting group CMC markets cut 17% of its workforce in a bid to cut costs and will achieve this by merging back office positions and automating jobs. This latest move comes not long after rival IG Group also announced that it would be cutting a large number of jobs. This seems to be yet another company that is “right-sizing” after a hiring frenzy in the last few years.

IN COMMERCIAL REAL ESTATE NEWS…

• A Canary Wharf office that was once owned by Bear Stearns was sold for £160m less than the current owner had bought it for seven years ago! This could be bad as it may drag prices down for the whole area.
• Staying with the area, Canary Wharf Group is having trouble with the Tower Hamlets council over converting empty office space into residential flats. It wants to convert offices into a mix of residential, retail and hotel space in an effort to future-proof landlords as working patterns continue to change whereas the council wants to keep it office-heavy.

IN RESIDENTIAL PROPERTY NEWS…

• The latest Halifax figures showed that UK house prices increased by 2.5% in the year to January, making it the biggest increase since January last year!
• Meanwhile, over 100,000 mortgage borrowers are in trouble according to the latest data from UK Finance. The number of homeowners in arrears on their outstanding balances in the last quarter increased by a hefty 25% from the same quarter a year earlier.
• The UK’s going to get Dutch-style mortgages, which are fixed rate mortgages where rates fall automatically as borrowers pay them down! The lower rates in the UK only usually kick in when homeowners remortgage – so this sounds like a very interesting innovation! April Mortgages will offer loans to existing homeowners who are remortgaging and new buyers at the end of next month.

IN CONSTRUCTION NEWS…

• Confidence among industry players is rising, according to the latest S&P Global PMI for the services sector, thanks to rising expectations of interest rate cuts and weakening inflation.
• Barratt bought rival Redrow in an all-paper £2.5bn deal which they say could generate major cost savings. This represents one of the biggest deals between two UK-listed companies in the last year!

• ESPN, Fox and Warner are getting together to create a sports streaming platform that will have content from all major leagues in a deal that will transform the whole landscape of sports and media! The new service, referred to by some as “Raptor”, will comprise of content that covers about 55% of US sports rights! This caught the NFL and NBA completely off-guard so it’ll be interesting to see whether this will result in a shift in power for future negotiations.
• Disney unveiled a new roadmap for Disney at its latest quarterly earnings report. It is also going to invest $1.5bn in Epic Games and outlined a number of other initiatives at its earnings, which came in above market expectations.
• News Corp announced Q2 revenues that came in above market expectations thanks to strong performance in its digital real estate services, Dow Jones and book publishing businesses. It hopes to be a “core content provider for Generative AI companies” and remains in negotiations with AI players…
• Spotify posted a loss in Q4 last year despite the number of monthly active users and subscribers being above target. Lay-off costs and its push into audio books hit finances.

IN LEGAL ISSUES…

• The Elon Musk-Delaware court tussle is an interesting one as it highlights both Delaware’s supremacy in corporate law and Texas’s desire to challenge this (presumably with Musk’s backing if his appeal doesn’t go the way he wants it to!). We’ll have to see how this works out because it might prompt other companies to change where they are incorporated.
• The UK has delayed a much-anticipated code that governs the training of AI models using copyrighted material because it hasn’t been able to agree on a voluntary code of practice. This needs sorting ASAP but I’m guessing that the longer the delay, the more this benefits Big Tech companies.

ELSEWHERE…

• Uber announced its first ever annual profit as its earnings came in above market expectations.
• Novo Nordisk struck a $11bn deal to expand production of the Ozempic weight-loss drug by buying up three manufacturing sites. This should help with any production bottlenecks.

My favourite video this week was the one where some very famous air passengers got bumped from First Class to Economy!