Watson’s Weekly 22-06-2024

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 the UK’s inflation rate hit its 2% target, when Nvidia became the most valuable company in the world and when Fisker became the latest EV start-up to fail…

• IN THE US – one of the top Fed officials said that recent data showing discounting at big retailers and sluggish sales shows that a consumer spending slowdown is “finally” taking place, increasing the likelihood of an interest rate cut this year.
• IN CHINA – the latest data from the National Bureau of Statistics showed that industrial output grew by less than expected in May although exports (particularly those of steel and aluminium) were pretty good, as were retail sales.
• IN EUROPE – there was a lot of chat about the repercussions of Macron’s decision last week to call a snap election. Some said that the EU should be hoping for a Le Pen win as it might be able to get more out of a Rassemblement National government. Parties on the extreme right and the extreme left currently look like they will get France into even more debt if they stick to their current spending plans. In the meantime, French businesses are trying to build bridges with Le Pen (I guess because they think she’s going to win!) but it has spooked investors to the extent that London overtook Paris in terms of market size (more because French stocks were sold off rather than British stocks doing particularly well) and trendy Italian sneaker brand Golden Goose decided to postpone its IPO due to concerns about the uncertain macro environment in France.
• IN THE UK – inflation hit its 2% target but the Bank of England left interest rates unchanged for the seventh time in a row. Labour said that it would improve UK-EU trade terms if it wins the election and forge closer ties with the EU on carbon tax. Somewhat ironically, recent developments in the European parliament and French politics may make the UK an “island of stability” and given that the bloc seems to be having a rough time of it, maybe the new government (especially if it’s Labour) will be in a better position to get better terms with Europe.

IN OIL & GAS NEWS…

• The oil industry is getting a bit nervous about Labour’s North Sea tax pledge and says that increasing the tax will make investment much less appealing.
• Russia is continuing to supply Europe with gas and actually overtook the US as a supplier for the first time in almost two years in May (but that was probably due to a number of one-off factors).

IN ENERGY NEWS…

• Rolls-Royce is continuing to pressure the UK government into making a decision on SMRs, understandable given that it’s in the mix with a number of other companies to win a lucrative UK contract.
• Research from Offshore Energies UK shows that wind actually outperformed gas over Q1, becoming the UK’s main electricity source for the first time. It looks like this will continue for the rest of the year…
• Roof space on warehouses is increasingly been seen as an opportunity to spread the use of solar energy. OK, so this depends on the cost of installing panels on the vast roof space (not just the panels but the structural reinforcement needed) and the prevailing price of electricity in that location, but this sounds like something that could be pretty useful.

IN OTHER COMMODITIES NEWS…

• Chinese warehouses have built up the biggest surplus of copper in four years thanks to the combination of a price spike and anaemic consumer demand. One of the major reasons for this is tepid activity in the real estate sector which can power demand for copper due to the metal’s use in electrical wiring, plumbing and household appliances.

IN BUSINESS TRENDS NEWS…

• Australia’s trade with China hit record highs over 2023 despite a tricky relationship over defence tensions in the region. Chinese premier Li Qiang went on a four-day visit in Australia this week, taking in the mining and winemaking regions in the first visit by a Chinese leader since 2017.
• Research by think tank IPPR says that investment in the UK has lagged other G7 members for 24 out of the last 30 years. Public sector investment has also trended below the G7 average, so it looks like the next government has got its work cut out!
• UK manufacturers expect orders and output to increase significantly in the second half, saying that order books have doubled in the last three months thanks to exports – with demand from the US being particularly strong. Business confidence is now at its highest level for ten years!
• Investment banks are raking it in currently, according to Dealogic, as revenues from trading and deals have risen by 25% over the first six months of the year. JP Morgan, Goldman Sachs and Bank of America were the top performers over the period. This increase in activity would also suggest that business confidence is also on the rise…
• KPMG said that it will be cutting an additional 200 jobs following a review of its cost base. It said that sluggish demand for its services and a slowdown in natural attrition has forced its hand. It’s not the only one to have had to do this – PwC just made a “significant” number of “silent lay-offs” in recent weeks. YouGov’s share price almost halved on its profit warning announcement – this was thanks to a slowdown in its consultancy business where it advises corporates on the collection of data and how to interpret it. It is well-known for its polling (particularly in elections!) but this is only a small part of the business. It just seems that corporates aren’t prioritising consultancy work at the moment.
• Investment in defence tech start-ups is gathering pace in Europe, according to the head of NATO’s €1bn venture capital fund. This isn’t surprising given the sudden boom in defence spending since Russia invaded Ukraine.

IN EMPLOYMENT TRENDS…

• The rise in defence spending is resulting in global defence groups hiring at their fastest rate since the end of the Cold War as they race to fill orders.
• JP Morgan lifted the bonus cap, meaning that UK workers can now earn up to 10 times their basic pay. Goldman Sachs was the first to respond to the lifting of the bonus cap in October last year by lowering basic salaries but allowing workers to earn up to 25 times their salary.
• There’s been a lot of comment on junior lawyers earning upwards of £150,000 among “magic circle” firms, while some American firms pay even more. This could have some unintended consequences but clearly British firms want to keep up with the Kennedys. This reminds me of what happened in the UK with investment banking in the 90s when the Americans came waving their chequebooks – and look at what happened since then!
• There was a paper published in Science this week which concluded that higher earners are more exposed to the impact of AI than lower paid employees. The report covered over 900 occupations and highlighted uncertainty over AI’s impact on employment. Jobs most affected included blockchain engineers, clinical data managers, PR specialists and financial quant analysts.

• Silicon Valley firms are getting increasingly paranoid about corporate espionage, particularly from China, and are tightening their security vetting of employees. Companies including Google, OpenAI and Sequoia are increasingly concerned about the potential leakage of intellectual property and company information.
• Nvidia became the world’s most valuable company, overtaking both Microsoft and Apple for the number one spot. It’s a great achievement to get to this position but I suspect it will be hard to stay there!
• OpenAI co-founder Ilya Sutskever launched his own AI start-up called Safe Superintelligence just one month after quitting OpenAI. He said that it won’t be commercially motivated but I have to say that I doubt this can last forever as investors are bound to want to see some kind of return further down the line.
• Apple was charged under EU’s new Digital Markets Act for restricting competition in its mobile app store. The European Commission said that Apple is not doing enough to point users to offers outside its App Store without slapping them with fees. Meanwhile, Apple ditched Apple Pay Later, its BNPL service that launched in the US last year. The agreements and partnerships it started out with have mostly run their course and it seems that Apple is now looking to provide the same or similar services – just with less risk!
• TDK said that it had made a technical breakthrough with small solid-state batteries. It has developed a new all-ceramic material for batteries that can hold more charge, charge more quickly and be more stable than what’s available currently. At the moment, this will only be for small devices – not EVs.

IN CONSUMER TRENDS NEWS…

• Although inflation has come down to 2%, ONS figures showed that services price inflation is still high while a report from KPMG showed that consumers are reining in spending on eating at restaurants, takeaways and clothing as they continue to concentrate on spending on the basics. That being said, the latest GfK survey said that consumer confidence has bounced back to its highest level since November 2021! This is the third consecutive month of rising confidence and came in above market forecasts and has been driven almost entirely by optimism over the health of the economy.

IN RETAIL NEWS…

• Asda saw another drop in sales as it continues to lag the performance of its rivals. Britain’s third-biggest supermarket chain was the worst-performing supermarket over the quarter and continues to lose market share.
• Games Workshop announced a strong year of sales and profits and topped it off by distributing £18m in cash to each of its employees.
• Ocado saw its share price slide on news that its Canadian supermarkets partner, Sobeys, decided to suspend the launch of its new automated warehouse blaming a weaker online grocery market. This follows hiccups with other retailers in the US (Kroger) and Australia (Coles), not to mention the niggles it has been having with M&S in the UK. Tricky times…
• Chinese e-tailers without international exposure are likely to suffer as the “618” annual online shopping event proved to be disappointing. At least those with international exposure, like Alibaba and JD.com, still have growth to go for (although this is costing them a lot).
• Talking of Chinese e-tailing behemoths, Shein is looking to diversify into other areas such as furniture, electronics and petcare via third party vendors selling on the marketplace it set up last year. Recent market research shows that use of the app has reached a plateau globally so it makes sense to diversify.

• IN REAL ESTATE NEWS – Chinese house prices fell at their fastest pace since October 2014, according to the latest data from the National Bureau of statistics. This was the eleventh consecutive month of falling property prices in China despite various stimulus efforts from the government. In the UK, housebuilder Berkeley was confident enough to lift its outlook for the year ahead, adding that it would be diversifying into the London rental market by launching its own build-to-rent business. The latest research from Rightmove showed that UK house prices have remained near record high levels. It seems that owners of high-end properties are holding off to see what the next government’s going to do while pent-up demand in the “mass market” has powered ongoing activity despite higher mortgage rates.
• IN CAR NEWS – BYD continues to aim to “break” Europe – it’s the only carmaker to sponsor Euro 2024 – despite poor EV sales across the region. Performance was particularly poor in Germany and the Netherlands. Meanwhile, Fisker filed for bankruptcy protection late on Monday. Another EV start-up bites the dust…
• IN M&A NEWS – NatWest took on most of Sainsbury’s banking business – but this was notable because Sainsbury’s paid NatWest to take it on as it would be taking on more liabilities than assets in the deal. Tate & Lyle struck a $1.8bn deal to buy food ingredients supplier CP Kelco which will help the former’s efforts to develop and sell healthier products. Elsewhere, Honeywell International just announced an all-cash deal to buy aerospace and defence tech company CAES Systems from PR firm Advent International. This should enhance its offering but it is actually quite a small deal in the scheme of things as Honeywell itself is worth almost $140bn!

My favourite “AND FINALLY” video this week was the sweary mum-dancing in the kitchen! This lady is talented!