Watson’s Weekly 15-10-2022

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 DAY IN BRACKETS 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.

Kwarteng loses his job, the U-turns continue and VW invests big in China…

• The IMF forecast a “very painful” outlook for the global economy (Wednesday), citing China’s zero-Covid policy, its troubled real estate market, the Ukraine war and the global interest rate vs inflation battle that’s raging on.
• IN THE US – inflation keeps rising (Friday) as official figures reflected a surprise increase for September. This is another blow for Biden following his recent attempts to sweet-talk the Saudis into delaying an oil production cut to help him out ahead of the midterms that failed spectacularly as OPEC+ sided with Russia Saudi Arabia just wanted to protect its oil interests.
• IN THE UK – well, what can I say?!? Kwarteng’s departure from the role of Chancellor was simultaneously shocking, but also not shocking given the seismic aftershocks of his “mini”-Budget. He was replaced by the experienced and battle-hardened Jeremy Hunt as Chancellor and, as things stand, Truss may even be following Kwarteng to the exit. The Bank of England got involved (Wednesday) by intervening in the bond markets and ruling out further intervention beyond the end of the week. I think that Andrew Bailey’s ongoing incompetence is being eclipsed by what’s going on in the government at the moment – and he has been handed the perfect excuse to go back on what he had originally promised (“sorry everyone, but the situation’s changed now”). In the midst of it all, Britain’s GDP shrank unexpectedly in the August quarter (Thursday), which was probably another nail in the coffin for Kwarteng.

IN ENERGY NEWS…

• Some electricity generators, including SSE and RWE, are set to see winter profits rise (Thursday) because even though input costs have increased, electricity prices have gone up even faster. The optics on this aren’t great given that companies using gas-fired power stations are the ones making the most money whilst also being exempted windfall taxes (although who knows whether that’ll change or not?!?). Investors continue to push for more clarity on these taxes (Thursday) so they can factor it into their forecasts.
• On the plus side, more companies will now get the energy bailout (Wednesday), assuming current criteria stick as the regime broadened the number of businesses who would be eligible for energy bill support.
• In renewables, it’s concerning to hear that the European wind industry is “struggling” with increasing costs (Wednesday) while Chinese competitors can just undercut them. The main problem is that European turbine manufacturers are tied into long term contracts while costs of raw materials, like steel and copper, have sky-rocketed! Share prices of companies including Vestas, Nordex and Orsted have suffered particularly badly as a result…

Meanwhile, UK firms are engaging in all sorts of measures to cut energy bills (Monday), including turning Curry’s turning down the brightness of their TVs, Oxford Street Christmas lights being LEDs etc.

IN EMPLOYMENT…

• A lot of UK recruiters reported results this week. Robert Walters (Wednesday), PageGroup (Thursday) and Hays (Friday) all said that they’d had a decent quarter but momentum is slowing and the outlook is uncertain.

IN CONSUMER TRENDS…

• Households are cutting back on spending (Tuesday) – particularly on big ticket items like PCs (Tuesday) – and although a CBI survey said that although a decent number of businesses are going to lift pay with inflation (Tuesday), the real value of wages continues to fall (Wednesday) as things like grocery inflation hit record levels (Wednesday). Weakening consumer confidence is leading to a drop in footfall at retailers generally (Tuesday) – in London’s West End (Monday) – and rising demand for “safe” assets like gold (Friday). Consumers are being called on to cut gas and electricity use by Ofgem (Friday) and despite the recent petrol price rises after OPEC+ members said they’d cut oil production (Wednesday), customers are putting off the switch to electric vehicles (Friday) because their bills are just too high.
• On the other hand, Entain is benefiting from people gambling (Friday) and airlines like IAG, easyJet and Delta are benefitting from people wanting to get away from it all (Friday).

IN LEISURE TRENDS…

• People are still spending at Hollywood Bowl (Tuesday) but research from ABTA shows that a third of Britons will cut holiday spending (Wednesday) due to rising living costs and Heathrow is also painting a gloomier picture past Christmas (Wednesday). On the high street, the City continues to lose restaurants (Monday) as pubs across the country close down (Monday).

IN THE WORLD OF RETAIL…

• Amazon seems to be scraping the barrel as it is trying to revive flagging sales (Wednesday) with an additional Prime Day, US rivals have brought forward Black Friday sales (Tuesday) and US grocery store giant Kroger announced plans to buy rival Albertsons (Friday). On the plus side, Ikea is doing well from sales of products that could help cut heating bills (Friday) and Boots put in a solid performance (Friday), partly thanks to its own-brand rival to Viagra!
• In the UK, M&S is accelerating its store closure programme (Thursday) and Joules is trying to negotiate cheaper rents (Tuesday) to eke out its existence.

Recent ructions in the housing market have put a spotlight on the sector…

• The Oxford Economics consultancy reckons that UK house prices are “overvalued by a third and likely to fall” (Monday), there’s a rise in the number of borrowers falling behind on mortgage payments according to Santander (Tuesday), which may mean that repossessions will rise (Thursday) and wealth manager Quilter reckons that those who are particularly vulnerable will be the ones who bought with a low deposit over the last year (Thursday) due to potential negative equity.
• With all of that as a backdrop, it’s not surprising that the demand for new builds is falling (Thursday) and that investors are trying desperately to exit property funds (Monday). In addition, Goldman Sachs reckons that skyrocketing borrowing costs are going to scare buyers off the commercial property market (Friday).

• IN SEMICONDUCTORS – Samsung and TSMC got an exemption from new chip restrictions on China (Friday), which sounds like Biden’s recently “restrictions” will have a much watered down impact than had originally been implied, although Lam Research, Applied Materials and KLA Corporation are complying (Friday). Separately, VW announced a €2.4bn chip venture with a Chinese AI specialist (Friday), which flies in the face of America’s efforts to scupper China’s tech evolution.
• There were some really interesting new initiatives announced this week! Netflix launched a £4.99/month subscription option that has ads (Friday), Apple announced a new high-yield savings account supported by Goldman Sachs (Friday) and Meta Platforms unveiled a new VR headset (Wednesday). And if that wasn’t enough, TikTok’s parent ByteDance is looking at doing more in music streaming (Thursday) and has started talks with music labels to that end.

• IN CAR-RELATED NEWS – Rivian announced a recall of almost all of its vehicles (Monday) but Tesla hit a new sales record in China (Tuesday) and Mercedes-Benz managed to double its EV sales in China (Wednesday), with overall sales up by a respectable 20%. Sadly, Britishvolt continues to have major problems (Wednesday) and it looks like it may even resort to selling itself.
• The rapid grocery delivery space could be consolidating further as Getir is in talks to buy Gorillas (Tuesday). This industry needs scale to survive long term, so this makes sense.

• Watson’s Yearly updates 2021/22: there have been updates in the G20 statistics (some inflation and unemployment rate changes) as well as country updates. Please click HERE to see Watson’s Yearly and the changes. Changes have been highlighted in this purple colour 👍 You will be able to see how themes and countries develop throughout the year by reading this document! 

For me, the “alternative” story I felt that I could really identify with this week was Man shares horrendous ’29 hour flight’ with kids screaming for the entire journey (The Mirror, Ellie Fry). Gotta feel sorry for all involved!