Watson’s Weekly 10-08-2024

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 immigration riots, a major markets sell-off and a big setback for Google (and ultimately, Apple)…

• IN THE US – it seems that the Democrats have closed the gap with the Republicans in the presidential race as Harris’s emergence has given their campaign new pep. Talking of which Kamala Harris announced her new running mate, Minnesota governor Tim Walz. It’s all smiles and rainbows now but signs of a wobble in the US economy could make things harder for Harris to get elected because it could cause the Democrats’ stewardship of the economy into question and last week’s worse-than-expected jobs data prompted Goldman Sachs to raise its estimates on the chances of the US slipping into recession.
• IN CHINA – we saw that Chinese inflation rose faster than expected in July, according to the latest official data. It looks like this is probably because of higher prices as consumers remain pretty cautious about spending at the moment. Also, China’s export growth lost momentum while imports rose, according to the latest official figures from Chinese customs authorities.
• IN EUROPE – the EU has inched ever-closer to a trade deal with South America – something that has been in the works for the last two decades! Will this be a case of better-late-than-never??
• IN THE UK – Chancellor Reeves went on a three day visit to New York to drum up business/investment and Canada to get ideas about consolidating UK local government pension funds (Canada has done this for quite some time), which she thinks will give them a bigger pool of money that will enable bigger and more sustained investment in UK assets and infrastructure (although, ironically, the big Canadian funds are often criticised for investing more in non-Canadian assets!). The good economic news keeps on coming – and although it came too late to benefit Sunak and chums, the ONS said that the UK economy emerged from the pandemic in better shape than had initially been thought and it upgraded its GDP growth figure for 2022. Updates for 2023 and 2024 estimates will be incoming in September. The flipside of this is that there is a risk that a strengthening UK economy might mean higher interest rates for longer to calm services sector inflation in particular. On the subject of employment, the government is looking to ditch anti-strike laws (which I think will store up problems for the future) while, at the moment, wage growth is slowing down according to the latest report by KPMG and REC. The government is also looking at potentially restricting overseas hiring in some high-skilled areas, in a departure from the policy we’ve seen until now. There were anti-immigration riots this week as tensions flared between right-wing extremists, who mobilised using platforms including X and Telegram, and supporters of migrants. It has all been powered by ignorance because immigrants, contrary to popular belief, do not take up much in the way of resources, the majority of them are here on proper visas, their effect on crime is miniscule and they actually contribute more to the NHS than they take out. In other developments, the UK is going to introduce a bill to regulate ESG agencies in a crackdown on the whole sustainable ratings industry. It’s about blimmin’ time!!!
• IN BANGLADESH – we see that the long time PM of Bangladesh, Sheikh Hasina resigned ran away to India following weeks of anti-government demonstrations. Unrest continues…

IN MARKETS NEWS…

• Markets tumbled this week as investors got spooked by last week’s disappointing US jobs data and the surprise interest rate rise implemented by the Bank of Japan. There was talk about the sell-off being due to the “unwinding of the carry trade” but I think that was a load of old ⚽🔒🔒, particularly as Japanese interest rates are still very low compared to pretty much everywhere else. Markets bounced back, but I’m sure that this has shaken many investors from their summer stupor (at least for the moment).

IN COMMODITIES NEWS…

• IN LITHIUM – mining giant Rio Tinto is backing Aussie start-up, ElectraLith, that is developing a lithium extraction technology that could enable access to new reserves of the key EV battery ingredient that would reduce the world’s reliance on China. Meanwhile, the world’s biggest lithium producer, Albermarle, is now pushing for governments for more help to break the dominance of China in the supply and refining of lithium, a key ingredient in EV batteries. This action has been prompted by the recent collapse in the price of lithium, meaning that non-Chinese producers (whose production costs are higher than China’s) are suffering particularly badly.
• IN COAL NEWS – investors voted overwhelmingly for Glencore to keep its coal business and not spin if off to list in New York. It seems that being in the black is valued more highly than being green…
• IN OIL – Saudi Aramco opted to pay out record dividends despite shrinking profits. However, don’t read too much into this as Saudi Aramco is an unusual company in that the government owns 81% of it and its sovereign wealth fund owns 16%, which makes it a bit of a piggy bank for the state 🤣. Normal drivers don’t really apply here!

IN BATTERY NEWS…

• China’s battery industry faces consolidation as demand for EVs both domestically and abroad continue to weaken. There’s probably a lot of scope for it given that there are currently about 50 Chinese EV battery groups producing in China’s domestic market alone.
• A Mercedes-Benz EV – that wasn’t charging at the time – caught fire in a South Korean underground car park causing massive amounts of damage as the fire took eight hours to extinguish. I would have thought this will be bad for EV insurance premiums (surely they’ll go up after this?) and South Korean EV makers like Hyundai (which is a pain because Hyundai is at the forefront of this category) and it will give everyone another reason not to buy an EV.

IN VEHICLE NEWS…

• Lucid got an additional $1.5bn from Saudi Arabia’s sovereign wealth fund, the PIF (which already owns about 60% of the company). This will come in very handy as we all know that EV start-ups burn cash like crazy. It’s good that it has such a deep-pocketed sugar daddy to rely on – particularly given weak demand for EVs at the moment.
• In China, sales of EVs have now surpassed those of traditional cars for the first time, according to the latest figures from the China Passenger Car Association. At least some of this was down to a government programme pushing more aggressive incentives to encourage the replacement of cars.
• In the UK, the SMMT showed that carmakers have cut their forecasts for EV sales this year thanks to ongoing sluggish demand. Although the number of EV registrations trended higher in July, sales to private customers continued to fall. On the plus side, the latest data from the SMMT shows that sales of used EVs in the UK have been rising thanks to weaker prices.

IN TECH NEWS…

• Google hired the founders of chatbot start-up Character.AI but you do wonder whether this is going to attract the attention of the regulators down the road as it does look very much like a takeover in all but name!!!
• OpenAI lost another co-founder, this time John Schulman, to Anthropic – the latest OpenAI employee to jump ship. Staying on the subject of OpenAI, Elon Musk has decided to sue OpenAI again, alleging that the company manipulated him (Musk) into co-founding the AI company. He only recently withdrew a similar lawsuit without explanation. There is something very weird going on with Musk at the moment IMO.
• Meanwhile, the CMA launched an investigation into the Amazon/Anthropic deal to decide whether it was anti-competitive. It will decide whether or not to progress to a “Phase 2” investigation by October 4th.
• IN CHIPS NEWS – Intel looks unlikely to turnaround any time soon despite the drastic cuts announced last week because it’s still suffering from a combination of Intel’s spending, poor demand for PC chips and customers opting to buy Nvidia’s chips instead of theirs. Meanwhile, next-gen chips from Nvidia
• IN APPLE-RELATED NEWS – Apple has made additional App Store changes in a bid to avoid EU fines, changing its EU business terms for the fourth time in four months to comply with the DMA. Basically, Apple is going to open up the iPhone to competitors’ app stores and payment methods, allowing developers to direct users outside its App Store. There was also bad news for Apple as it turns out that investor Warren Buffett sold pretty much half of his stake in the company over Q2 and Google lost a lawsuit (more of this below), meaning that Apple may lose some very handy income which may actually open opportunities for Google’s rivals.
• IN GOOGLE-RELATED NEWS – Google lost its landmark US antitrust case (this was about having too much power in search) and was judged to be “a monopolist, and it has acted as one to maintain its monopoly” by the DoJ. We await the “punishment” while Google says that it will appeal the decision. Repercussions could be wide-ranging and may potentially encourage competition. Also, an investigation by the FT showed that Google and Meta did a dodgy marketing project that circumvented Google’s own rules about targeting minors online. Google did a marketing project for Meta designed to target 13-to-17-year-old YouTube users with ads promoting Instagram. Interestingly, the FT confronted both companies with its findings and the project, that was due to be rolled out more widely, has now been ditched. Will this be swept under the carpet?? It sounds pretty darn serious to me!

IN MEDIA NEWS…

• Disney’s results were mixed. On the one hand, Disney made its first ever streaming profit (and we saw that it plans to jack up the price of its most of its streaming plans later this year) but then its parks business suffered because US consumers are reining in spending.
• Warner Bros Discovery made a big write-down of its cable TV business. It was so big, in fact, that it pushed the company into loss. Paramount also made a big write-down of its channels and it also announced a 15% in its US workforce as a consequence of its recently-announced merger with Skydance.

IN SOCIAL MEDIA NEWS…

• X announced that it was going to sue the Global Alliance for Responsible Media for the “illegal boycott” of its platform. It also shut down its San Francisco HQ and pushed back against accusations that it stoked the UK riots. I think that Musk is either a) going mad, b) becoming so outrageously arrogant that he thinks he is above everyone, c) is stirring because he’s got some new car/initiative to push and/or there’s something bad going on in the background and he wants to distract attention because IMO why would you SUE your customers for making a decision they are entitled to make?? Also, he must be in denial if he thinks that X didn’t have any role to play in the riots. How would he feel if he lived here and was targeted because of this? Would he be such a defender of free speech if he or his family were targeted, enabled by his own social media platform?? I think he’ll eventually drop the GARM lawsuit as it seems to me he’s just trying to make a point. I also think that if he keeps behaving like this, he’s going to alienate people – and that’s not good for business. Sales of Tesla’s cars are already looking pretty ropey…
• Telegram (as in the social media platform, not the old fashioned method of communication 🤣) saw usage boom during the riots as extremist groups took advantage of the platform’s “hands off” approach to content moderation. Telegram seems to be the extremists’ communication platform of choice when things get rough. It gained a lot of notoriety in the Capitol Hill riots of 2021. This is going to sound mega-cynical but given all the tensions around the world right now, I wonder whether Telegram is going to see a surge in usage. The only thing, though, is how you would monetise a platform like that. As an advertiser, would you want to be associated with such a platform?? Maybe if you sell weapons, ammo etc…

IN CONSUMER NEWS…

• The US consumer spending slowdown is hitting travel and leisure groups – theme parks (e.g. Disney and Comcast-owned Universal Studios), Airbnb rentals, hotels and airlines are feeling the slowdown particularly keenly.
• Consumers in the US and China continue to rein in spending because of the cost-of-living crisis and real estate problems/increasing economic concerns respectively.
• Consumers in Muslim countries are boycotting major global brands because of their stance on Gaza – and the likes of Coca-Cola, KFC, Starbucks, Mondelez and Pizza Hut are getting hammered.
• Consumers tripled spending in pubs thanks to the Euros but overall spending fell in July. It was also interesting to note that 100% dry bars (i.e. no alcohol) are having a tough time surviving at the moment, mainly because customers don’t buy as many drinks per visit. Although they may be great for certain groups, I think this is ultimately a fad and that conventional venues will just provide more non-alcoholic options.

IN RETAIL NEWS…

• Prada continues to win in the luxury slump and its Miu Miu brand is doing really well at the moment.
• Cornish fashion brand Seasalt is doing really well at the moment and benefited from an expansion of its shop portfolio in its annual results.

IN LEISURE NEWS…

• I’ve already touched on this above but although Airbnb had a strong Q2, it announced disappointing Q3 revenue forecasts thanks to a slowdown in its domestic market.
• The UK Domino’s decided to pull back its full-year forecasts as the cost-of-living hit customers’ pockets. Domino’s had a disappointing start to the year but things have actually been picking up since the middle of May.

• IN CONSTRUCTION & REAL ESTATE NEWS – the latest construction sector PMI showed that the sector grew at its fastest pace since May 2022 in its fifth consecutive month of growth, which sounds encouraging! UK estate agents expect residential property prices to continue to rise and housebuilder Persimmon is also getting more confident about the market’s prospects. In commercial property, the strong demand for high-spec office property continues.
• IN FINANCIALS NEWS – French bank SocGen said that it wants to sell its UK and Swiss private bank businesses in an effort to streamline operations, Barclays has become the latest bank to ditch the bonus cap and insurer Beazley managed to double its first half profits despite concerns about the effect of the Crowdstrike outage and investment manager Abrdn announced early signs of recovery thanks to a slowdown in client money outflows and improving profitablity.
• IN PHARMA NEWS – Eli Lilly announced a strong set of results thanks to the success of its diabetes and weight loss drugs and it also announced an investment into isotope supplier Ionetix, which makes an isotope that is a key ingredient in many radiopharma drugs. In contrast, its weight-loss drug rival Novo Nordisk is suffering at the moment thanks to supply chain bottlenecks, so it had to cut its full year forecasts.
• IN PRO SERVICES NEWS – there was some debate as to whether AI could transform the traditional billable hour given that the use of AI can save a lot of time (and resource!). Will it result in more firms employing a flat fee structure?? In accountancy, 30 Chinese companies ditched PwC as an auditor and then Evergrande’s liquidators launched a legal action against the Big Four accountant for its role in the real estate giant’s downfall.
• Uber managed to return to profitability as its Q2 results beat market expectations thanks to decent performances from its core ride share and food delivery businesses. The company is also pretty confident about the outlook.

My favourite “AND FINALLY” video this week was this weirdly addictive music video!