Watson’s Weekly 17-06-2023

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 where Beyoncé was blamed for high Swedish inflation, UK banks jacked up mortgage rates and Odey Asset Management imploded…

• IN THE US – despite inflation slowing down the Fed left interest rates unchanged while also leaving itself room to raise rates in subsequent meetings.
• IN CHINA – China cut one of its interest rates – its seven-day reverse repo rate (this is used to regulate short-term liquidity in the banking system) – and then its main policy rate (a one-year rate that impacts bank funding costs) – in an effort to jolt the economy back to life because of its disappointing economic numbers.
• IN EUROPE – the ECB raised interest rates by 0.25% – the eighth successive time – to tame inflation. Interestingly, Beyoncé was blamed for Sweden’s stubbornly high inflation as the impact of her first world tour in seven years drove up hotel prices in Stockholm and the surrounding areas!
• IN THE UK – the governor of the Bank of England admitted that inflation was taking a lot longer than expected to come down and chancellor Jeremy Hunt said that interest rates would have to go up while the latest ONS data showed that the UK economy bounced back in April thanks to the increase in consumer spending.

IN MARKETS NEWS…

• Japan’s Nikkei hit its highest level for 33 years as more investors have come round to the conclusion that Japanese stocks are decent value.
• The LSE took a knock as WE Soda scrapped its flotation plans due to “extreme investor caution”, which I think means that investors told them where to go when they tried to push a bloated valuation 🤣. They are going off to the US in a huff, presumably because they think that there are more mugs over there. It will be interesting to see what the reaction is stateside and whether WE Soda sticks to its valuation or knocks it down a bit. Not great for the LSE though as it could do with the business.

IN CURRENCIES NEWS…

• Nigeria’s Naira collapsed after it ditched its currency peg, causing its value to officially fall by 23% (but traders say it actually fell by 40% – its biggest fall in history!). This could mean an influx of foreign investment as previous rules meant that it was easy enough to get money into the country but difficult to get it out.

IN COMMODITIES NEWS…

• IN OIL NEWS – Oil giant Shell decided to walk back its climate commitments and focus more on making profits from fossil fuels, paying a higher dividend and embarking on a chunky share buy-back programme! It sounds like it is doing what BP did a few months ago (and this is something I said would happen 🤣!). After all, a lot of fuss and threats were made to remove BP’s chairman at the time but he managed to survive all the noise, getting 90% of the vote! Then in Patterson-UTI Energy and NexTier Oilfield Solutions announced an all-stock merger as a trend seems to be emerging of oilfield services companies coming together so they can get better pricing power with the oil majors.
• IN COAL NEWS – Commodities giant Glencore decided to make a cash offer for Teck Resources’ coal business after a previous takeover offer for the whole business was rejected. Meanwhile, the current UK heatwave prompted the National Grid to fire up a coal-fired power plant in Nottinghamshire to meet rising power demand from aircon usage.

IN BUSINESS TRENDS…

• REGARDING CHINA – Chinese companies are increasingly eyeing opportunities in India a few years on from the highly damaging incident where Chinese soldiers killed some Indian soldiers on the Himalayan border in 2020. That prompted a major backlash from India but it seems that there is a thawing going on at the moment…Siemens announced big investments in China and Singapore, going against the general trend of trying not to offend the US by investing too much in China (although VW, AstraZeneca and Tesla have been ploughing on with their own China plans given its attractions!). Siemens hedged its bets a bit by choosing Singapore as an Asian hub.
• REGARDING M&A ACTIVITY – there is a definite trend of Big Pharma deal-making as it turns out that pharmaceutical and biotech companies spent $85bn on acquisitions in the first five months of the year as they use the cash they made under Covid to pump up their drug pipelines. Bunge made a cash-and-shares offer to buy Viterra in a deal worth $8.2bn as the grain shippers decided to get together and make the most of the profits they made last year. In the UK, Vodafone and CK Hutchison (which owns Three) expressed the desire to merge, although they’ll have to do a lot of convincing with the CMA while Snowfox Group (which owns Yo! Sushi) was acquired by Japan’s Zensho Holdings in a deal worth $621m. This is particularly interesting given that it comes not long after Japanese company Toridoll bought Fulham Shore (which owns Franco Manca and The Real Greek). Given how great the food generally is in Japan I hope that the standard of these restaurants will get even better (especially at Yo! Sushi!)!
• REGARDING POST-PANDEMIC BOUNCEBACK – Event company Informa’s strong results showed that in-person trade events are proving to be very popular post-lockdown but the slowing demand for management consultants reflects caution in the economy, as does a slowdown in advertising demand – which is what M&C Saatchi is experiencing – as both areas tend to do well when business confidence is either strong or bouncing back from a period of weakness.
• ELSEWHERE…BioNTech is now facing tons of German compensation claims from law firms representing clients who said they suffered lasting health damage from their vaccines.

IN CONSUMER TRENDS…

• REGARDING REAL ESTATE NEWS – unusual measures are being taken by property developers in China to sell properties – like offering up gold bars, mobiles phones and new cars – amid a tricky market. In the UK, London homeowners in particular are going to face massive mortgage payments hikes when they remortgage while more UK mortgages are pulled by Santander as NatWest and Nationwide jack their rates up and buy-to-let mortgages get whacked badly. Rising mortgage rates are clearly going to hit household finances badly.
• REGARDING SPENDING NEWS – Pub chain Fuller’s benefited from workers’ return to the office as its city centre pubs did well and Safestore saw revenues rise on strong demand from renters and homeowners.

IN EMPLOYMENT TRENDS…

• Recruitment agency Robert Walters announced a profit warning due to a slowdown in the jobs market, following a frenzied period of hiring over the last few years while stronger-than-expected wages growth numbers pushed government borrowing costs to a 15-year high.

IN BANKS NEWS…

• UBS announced a set of “red lines” that the new enlarged entity won’t let Credit Suisse bankers cross in order to reduce its exposure to risk. UBS is clearly sending out a message that it won’t fall into the same bad habits as its naughty new BFF.
• HSBC jacked up mortgages rates a few times this week and, separately, it was pressured to take on crypto clients – along with Standard Chartered – by the Hong Kong Monetary Authority as the territory makes a concerted push to be a crypto hub.
• There was mixed news from American banks as it turns out that Citigroup cut 5,000 jobs in the first half of 2023 thanks to the sluggish deal pipeline – which has been affected all investment banks – but then the CEOs of Goldman Sachs and Morgan Stanley said that there are early signs of recovery in investment banking revenues.

IN INVESTMENT/”BUY-SIDE” NEWS…

• Odey Asset Management started to make changes following last week’s revelation about its founder, Crispin Odey, but it looks like the hedge fund will actually be broken up.
• IN VC NEWS – Andreessen Horowitz announced plans to open its first international office in London as it reckons that it’ll be more crypto-friendly than the US, Insight Partners cut the target size of its $20bn tech fund as the “tech winter” (ex-AI, of course!) continues and VC firm Molten Ventures cut the valuation of Revolut in its portfolio by a whopping 40% as the regulator continues to drag its feet on approving the fintech’s application for a banking licence in the UK.
• IN ESG NEWS – research by S&P highlighted some massive discrepancies in how companies are classified in ESG terms. More clarity is most definitely needed here!

IN AI NEWS…

• The EU is on the verge of passing one of the world’s first bits of legislation on AI after approving a draft of “The AI Act” which includes things like a blanket ban on the police use of live facial recognition in public places, automated medical diagnoses, deepfake videos etc. Details have to be thrashed out but it won’t actually come into force until 2026 as things stand currently.
• OpenAI’s Sam Altman appealed for more engagement with the Chinese in helping to shape the future development of AI.
• The UK government announced an investment of almost £150m in AI for film and special effects. Talk about a contrast with Accenture announcing a whopping $3bn investment in AI over the next three years 🤣!
• Things really are getting ridiculous in the world of AI as a four-week old French AI start-up called Mistral AI just managed to raise €105m in its first ever funding round – and it doesn’t even have a product yet!!! Apparently the THREE ex-Meta and Google researchers who started the company reckon they’ll launch an LLM early next year. Good luck with that. This has massive echoes of the dotcom bubble when companies were reaching crazy valuations without providing any kind of product. And look how that turned out!
• The National Music Publishers’ Association is suing Twitter for alleged copyright infringement, saying that the platform is benefitting from using materials that it hasn’t paid for. Twitter is one of the only social media platforms not to have an agreement in place to use songs. Although this isn’t an AI story, I do believe that the way this is approached could be used with AI models.

IN NON-AI NEWS…

• The US has decided to ease its stance on South Korean and Taiwanese chip makers in that it has said that it is OK with companies such as Samsung and TSMC to have operations in China, suggesting that the practicalities of putting US wishes to cut China entirely out of advanced semiconductor food chain is actually impossible. That said, foreign investors – even long-time pro-China ones – are going cold on Chinese tech companies thanks to the ongoing US-China tensions.
• EU regulators are threatening that they might order Google to break-up, accusing the tech giant of abusing its powerful position in the advertising tech sector as it plays roles of gatekeeper, price-arbiter and competition all at the same time! This is something that US regulators are getting behind…
• Talking about US regulators, the FTC sided with the UK’s CMA in blocking Microsoft’s attempted acquisition of Activision Blizzard. The current merger agreement gives the two companies until July 18th to get the deal done, but both sides could potentially try to extend this deadline.
• UK bank TSB appealed to Meta Platforms to do more to clamp down on fraud that is being carried out on its platforms. It made a number of suggestions but obviously Meta is saying that it already has a number of measures in place.
• There was an interesting article which said that former co-founder of Twitter, Jack Dorsey, said that the Indian government had threatened to shut Twitter down if it didn’t restrict the accounts of government critics in the farmer protests of 2021. Obviously, the Indian government denied this, but you do wonder how Big Tech will behave against this kind of backdrop. Maybe they will be more inclined to play ball with the government given the potential of the market…

• IN REAL ESTATE NEWS – a trend seems to be emerging of investors putting money into the repurposing of London office space as WFH becomes the norm. On the residential side of things, housebuilder Bellway was quite downbeat about the volumes for the rest of the year but then again it did maintain full-year targets, so maybe it’s just being cautious.
• IN LEISURE NEWS – Heathrow reported that it has almost returned to full capacity after a tricky few years, confirming the feelgood we are getting from pretty much all companies that deal in holidays (airlines, hotels etc.)! Meanwhile, Travelodge was put up for sale by its US hedge fund owner as it aims to surf the feelgood wave and crystallise the value after buying the budget hotel chain back in 2012.
• NASDAQ put in an offer to buy financial software company Adenza in a $10.5bn cash-and-shares deal in what would be NASDAQ’s biggest ever deal!
• Frasers Group built up a stake in Asos over the course of the week, finishing up with 10.6% of the company. Will it go for a full takeover??
• Italian electric plane developer Tecnam decided to shelve work on its new battery powered plane and wait for further tech improvements as it discovered that its current model, the P-Volt, would have to have its battery replaced after just a few hundred flights making it it commercially unviable.

My favourite couple of videos this week were of what the view’s like from a high-up diving board and the memory of Mr Bean’s experience of it at the local swimming pool (which I think is one of the best Mr Bean’s moments ever)!