Watson’s Weekly 11-05-2024

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 when Argentinians got a new 10,000 peso note, when TikTok fought back and when Apple unveiled a new chip…

• IN GLOBAL NEWS – the OECD, IMF and WTO are all forecasting a doubling of global trade growth this year following a disappointing 2023 but then the Institute of International Finance said that global debt is at a new high thanks to major borrowing from China and India in particular.
• IN THE UK – the UK pulled out of recession with better-than-expected Q1 growth and the Bank of England left interest rates unchanged whilst indicating that summer cuts were on the cards. Sunak looks set to limp on after disastrous local election results last week as Tory rebels can’t be bothered to replace him and some are saying that a Labour government could boost prospects for the London market as investors may see it as new start after a tumultuous few years. Still, it turns out that HS2 is about to get the go-ahead to dig a 4.5mile tunnel under London within weeks – but it’s going to be at least partly funded by taxpayers! Sunak had originally promised that this would be funded by the private sector.
• IN SWEDEN – the country’s central bank, the Riksbank, cut interest rates for the first time in eight years – potentially putting pressure on the ECB to cut rates as well!
• IN ARGENTINA – the country’s central bank has released the country’s first 10,000 peso notes into circulation as rampant inflation has meant that everyone has to wander around with wads of cash! The previous largest note was 2,000 pesos (which was introduced last year) but the most common note is 1,000 pesos. Currently 10,000 pesos is worth about $11. The peso has fallen by 95% over the last five years and new president Milei is battling to bring inflation and the country’s currency under control.

IN COMMODITIES NEWS…

• IN OIL – Trump allegedly offered to shred Biden’s pro-EV agenda and un-freeze LNG export permits in exchange for oil and gas industry execs contributing $1bn to his re-election campaign! Meanwhile, Calpers the biggest public pension plan in the US, is looking at whether to vote against Exxon chief Darren Woods’ re-election to the company board in protest at the lawsuit the company filed against two climate-focused investors. There was an interesting article in the FT on why switching from a UK/European listing isn’t a cure for Europe’s oil majors because their cheaper rating reflects a discount due to their being further along on their climate commitments which means that their US cousins have more cash available to distribute to shareholders in the form of dividends and share buybacks (which makes them more attractive, hence the higher rating).
• IN MINING – it looks like Anglo American’s South African investors are potentially open to a higher offer from BHP, but BHP now has until May 22nd to make a formal bid under UK takeover rules. The drama continues…

IN CRYPTO NEWS…

• FTX looks like it’ll be able to repay creditors the full $11bn they lost once it sells off all remaining assets. This is an impressive outcome given the state of the company when John Ray III took over but this state of affairs has been helped enormously by the value of bitcoin more than tripling since it hit those lows!
• Retail brokerage Robinhood has warned of an imminent lawsuit from the SEC over its crypto business in the ongoing US regulatory clampdown on digital assets. This is a pain for the company rather than a disaster but it’s going to be interesting to see how this unfolds.

IN BUSINESS TRENDS NEWS…

• IN CHINA-RELATED TRENDS – The EU and France have been pressing President Xi for more balanced trade ties on the latter’s tour of Europe. The Europeans are potentially going to be slapping imports from China with tariffs which China says are just protectionist. Trade in China is on the rise thanks to a surge in imports of key equipment for the development of AI while Chinese tech companies are migrating towards the Middle East as part of their overall global expansion plans. Alibaba, Tencent and Shein are all among those increasing activity in the region.
• The US tech industry is on the verge of getting a major funding boost from the US Federal government as part of an overall effort to stay at the cutting edge of technology. This is likely to unlock more investment from the private sector.
• The UK’s IPO pipeline is “building up”, according to the LSE. It seems that companies are waiting for new (less strict) listing rules to come into force. The changes will represent the biggest overhaul of the primary market rules in 40 years!

IN EMPLOYMENT NEWS…

• The CEO of Reed said that employers are currently cutting back on hours and reining in hiring plans in reaction to the recent 9.8% increase in the National Living Wage.
• The latest research from KPMG and REC shows that the number of workers available to take up new jobs increased sharply over the last month as businesses reined in their hiring activity. This suggests that the labour market is cooling off which implies that there will be less upward pressure on inflation – something that the Bank of England will need to take into account when deciding the direction of interest rates.

IN CHIPS NEWS…

• The US tightened the ban on supplying chips to Huawei by revoking export licences allowing Intel and Qualcomm to supply the Chinese telecoms equipment company.
• Apple unveiled a new “outrageously powerful chip for AI” in its latest iPads, the M4 chip. This could be a sign of things to come re chips for AI-powered phones – something that is also likely to benefit Qualcomm.
• Arm underwhelmed the market with its full-year revenue forecasts, but then again it had a storming Q4 last year so it had a lot to live up to! That being said, I would have thought that it will be well-placed to benefit from on-mobile AI given its massive market share in smartphones.
• Intel cut its sales outlook following the revocation of its licences to sell to Huawei (see above!) but it kept its full year guidance unchanged.

IN AI-RELATED NEWS…

• It turns out that Microsoft has created a new “top secret” LLM that will be used by US spies. It is completely independent from the internet, which is why it’s suitable for spies!
• UK publishing and exhibitions company Informa has just struck a deal with Microsoft worth over $10m in its first year to allow access to its data to train Microsoft’s AI models. It’s the latest deal to be struck between an AI developer and a media group – and these deals are proving to be nice little earners if media groups can get them.

IN OTHER TECH NEWS…

• Japan, South Korea and Australia are all tightening rules that are designed to restrict the market power of Big Tech. This follows similar regulatory crackdowns in the EU and US. It seems increasingly that there’s nowhere to hide for Big Tech!

IN EV NEWS…

• Chinese car dealers are ditching non-Chinese brands because domestic brands are just selling better! Dealerships that are more EV-focused are doing well while those that are more weighted towards “traditional” cars are not.
• VW has called for Brussels not to increase tariffs on Chinese EV imports because it would risk “retaliation” against other international brands. I think that this is more about about covering its 🍑rse because it wants to protect its own business in China (something that Mercedes-Benz is also doing).
• Governments are starting to slap taxes on EVs to make up for the shortfall in revenues that they normally get for fuel duties on petrol-powered cars. EV fans will say this will slow down wider electrification while governments will be keen to make at least some money from EV owners rather than nothing!
• UK carmakers are calling for help to boost EV sales, which are sliding. If you take out fleet buyers who are taking advantage of tax breaks, demand looks particularly weak.
• IN TESLA NEWS – Musk has sent his chief fixer to China to revive its business there. Meanwhile, the Department of Justice is now investigating whether Tesla has committed wire and securities fraud by overstating the capabilities of its self-driving systems. The company really does seem to be having a tough time at the moment!
• Meanwhile, BYD said that it wants to leapfrog the likes of VW, Tesla and Stellantis to become the region’s biggest EV seller by the end of this decade! No wonder the European carmakers are keen to slow down their progress by slapping taxes on them!
• Demand for EVs is getting so poor at the moment that Ford has said that it is willing to limit the sales of petrol models in order to hit EV sales targets and avoid massive fines. Ford also said that its goal of only selling electric vehicles in Europe by 2030 will have to be pushed back.

IN OTHER AUTOMOTIVE NEWS…

• Used car dealer Cazoo is on the verge of insolvency after failing to attract emergency funding. What a sorry end for a company that was valued at $8bn on its New York flotation in 2021.
• British driverless car start-up Wayve just raised $1bn from SoftBank, Microsoft and Nvidia. Its approach to driverless differs from rivals in that it aims to “teach” vehicles how to drive from real-life videos rather than input a stack of “rules” that cover every eventuality.

OVERALL…

• The UK construction industry grew at its fastest pace in over a year in April thanks to a rebound in commercial real estate and civil engineering output which managed to offset the ongoing weakness in housebuilding.

IN COMMERCIAL REAL ESTATE NEWS…

• There’s some doubt as to whether new lab space in Canary Wharf will be the answer to the recent “exodus” of financial companies. Yes, you can charge higher rents but building costs are higher and there’s only so much demand. I’d also argue that by the time these facilities are built, M&A activity will have improved and demand from “traditional” financials services companies could well bounce back.
• Meanwhile, Heineken said that it was going to reopen 62 pubs and upgrade them to attract customers who are working from home. It already owns 2,400 pubs via its Star pub and bars division, so this is kind of a drop in the ocean – but it’s still a positive move!

IN RESIDENTIAL PROPERTY-RELATED NEWS…

• UK house prices held steady in April, according to the latest data from Halifax and the latest RICS survey showed that the housing market recovery is “stuttering slightly”. Still, estate agent Savills said that it reckons house prices will rise this year, reversing the forecast it made in November last year when it said that it expected the average price of a home to drop by 3% in 2024.
• It seems that the exodus from London to the ‘burbs that we saw under lockdown has slowed down considerably to the pre-Covid norm, presumably because of the return-to-office trend.
• Purpose Built Student Accommodation (PBSA) is turning out to be a big cash cow as big funds like Legal & General Investment Management have been hoovering up property while other buy-to-let landlords have been moving out of the market. LGIM and others are attracted to reliable returns and the mismatch between supply and demand.

IN CONSUMER TRENDS…

• The edge was taken off UK sales in spring by wet weather and an early Easter, according to the latest figures from the BRC. Concerns still remain over the economy but the expectation is that the economy will rebound as wages are now outpacing inflation after a long period where they were lagging.
• Research from Global Blue showed that tourists who would have come to the UK avoided it because of the lack of tax-free shopping. France, Italy and Spain have all benefited since the VAT scheme was scrapped in January 2021. Surely it’d be an easy win for Sunak to reintroduce it as it’d be a popular move for retailers and he can just leave the next government to deal with any consequences!
• Jeweller Pandora is benefitting from the sales boom in synthetic diamonds, particularly from young customers. Given that they are essentially the same as mined ones and sell at a third of the price, you would have thought that there is plenty of upside to go from here!

IN RETAIL NEWS…

• Shopify decided to cut its sales and margin forecasts for the current quarter as it expects weakness in Europe, negative impact from a stronger dollar and higher marketing costs. Investors didn’t take this well!

IN LEISURE NEWS…

• Airbnb’s profits more than doubled in Q1 but the company is more cautious about Q2. That being said it is confident about its prospects thereafter.
• Gordon Ramsay is going to open the UK’s highest restaurant and bar at 22 Bishopsgate in London in a building that is being described as a “vertical village”. Who said that the City was dead?!?

IN ONLINE MEDIA NEWS…

• Ofcom is putting more pressure on the tech industry to protect children online by outlining a proposed code consisting of over 40 measures that will form part of the UK’s Online Safety Act, which was passed in October. The Act is wide-ranging and gives Ofcom major powers to enforce big fines and criminal liability for non-compliance.
• TikTok and parent company ByteDance are suing to block the forced sale of the app in the US, saying that the law is unconstitutional and violates free speech. Separately, TikTok said that it will automatically label AI-generated user content, the first social media platform to do so. This is clearly a hot topic as everyone is fretting about the spread of online disinformation and deepfakes.
• Reddit beat market expectations and jacked up its forecasts in its first earnings announcement since its flotation thanks to solid user growth and the success of the company’s nascent advertising business.

IN “TRADITIONAL” MEDIA NEWS…

• Disney published its first profit in its core streaming business but investors seemed to be more concerned about a potential slowdown in its theme parks after the initial post-pandemic frenzy. Meanwhile, Disney and Warner announced plans to join forces to offer a bundle of their streaming services in a bid to simplify choices in an ever-more fragmented streaming market. The new package will offer Disney+, Hulu and Warner’s Max service in both ad-free and ad-supported formats.
• Warner Brothers Discovery posted a bigger-than-expected drop in revenues thanks to a sharp dip in ad sales at its cable TV division and the impact of last year’s Hollywood strikes by actors and writers.

• IN FINANCIALS NEWS – HSBC is appealing to the government to rein in new national security rules that aim to restrict China’s influence in the UK. If these pleas are ignored, companies will have to publish details about their commercial dealings with China, which they are clearly not a fan of! UBS managed to beat its own and market expectations in its latest quarterly results and it looks like the positive momentum will continue! In insurance, Direct Line’s performance has been hit by worse-than-expected weather and a fall in the number of motor customers. The company’s just had a top management shake-up and the CEO says that there have been some positive signs at the beginning of 2024.
• Boeing’s nightmare newsflow continues as it had to call off its Starliner spacecraft launch due to an issue with a component! When will Boeing’s nightmare end??
• Ferragamo posted disappointing Q1 revenues as weakness in China hit its performance. Luxury brands have had a mixed performance of late – and Ferragamo is definitely in the “losers” category along with Kering and others. Winners, on the other hand include the likes of Prada, Hermès and Puig.
• Uber underwhelmed versus expectations in Q1 thanks to legal costs incurred over its decade-long battle with regulators – including a $178m charge to settle a class-action lawsuit brought by taxi drivers in Australia. This is a bit of a downer considering that it was only a few months ago that it trumpeted its first ever annual profit!
• AstraZeneca announced the end of an era as it said that it would be withdrawing its Covid-19 vaccine worldwide due to a “surplus of available updated vaccines”.

My favourite “AND FINALLY” video this week was the one with Big Brother watching commuters on the London Underground 🤣!