Watson’s Weekly 23-07-2022

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.

This week saw a lot of drama in Europe, with the ECB getting off its behind and Italy heading towards chaos…

• IN CHINA – China lockdowns were put in place to control the BA.5 Omicron subvariant (Tuesday) and Goldman Sachs reckons that Chinese cities with districts falling into the mid-to-high risk category account for just under 25% of China’s GDP. All these zero-Covid measures are continuing to chip away at the country’s GDP growth potential. Concerns are also increasing over an invasion of Taiwan by China (Wednesday) as demand for political risk insurance is climbing sharply and inquiries to consultants and China experts about the likelihood of an invasion rise. The general consensus currently is that an invasion is unlikely, but then again they said the same about Russia and Ukraine…
• IN EUROPE – the IMF warned that Europe would fall into recession if Russia stopped gas supplies (Wednesday) while the ECB went and raised interest rates for the first time in over a decade (Friday) in order to do something to curb inflation.
• IN ITALY – Italy is going to have a September election (Friday) because PM Mario Draghi quit after his coalition partners couldn’t agree on his policies. Putin must be loving this as his war is working a treat with splitting the unity of Europe. Germany and France are in an energy crisis and Italy is in all sorts of problems.
• IN THE UK – there was a lot of talk about the potential for a big (0.5%) rate hike as UK inflation hit a 40-year high of 9.4% (Wednesday) and one member of the MPC mooted the possibility of interest rates creeping above 2%.
• IN SOUTH AFRICA – the central bank announced its biggest interest rate rise for almost 20 years (Friday) to combat inflation. It hiked its interest rate by 0.75% to 5.50%.

As you’d expect, there was a lot of comment on the energy sector (and I’d expect this to carry on for quite some months to come)…

• IN UTILITIES NEWS – The French government is going to pay €9.7bn for the 16% of EDF it doesn’t already own (Wednesday), but given that it’s racked up the debts under the state’s stewardship, you do wonder what difference this is going to make! Germany’s Uniper is on its knees at the moment (Tuesday) as it turns out that Europe’s biggest buyer of natural gas has burned through an emergency loan of €2bn in only six months! Things are looking so bad that it’s in talks with the German government about a potential bailout.
• IN GAS NEWS – Brussels is calling on member states to cut gas usage “immediately” (Tuesday) with the European Commission sending out a list with voluntary reduction targets – although there has been a lot of speculation as to whether this will actually work (Thursday). Europe was on tenterhooks as to whether Russia would actually switch the gas back on after “scheduled maintenance”, but it did in the end (Thursday).
• IN NUKE NEWS – Chevron invested in Google-backed nuclear fusion start-up TAE Technologies (Wednesday) as more money continues to be poured into this area. Meanwhile, the UK government gave planning permission for Sizewell C (Thursday), a 3.2gigawatt twin-reactor plant in Suffolk.
• IN OIL NEWS – BP said that the windfall tax would not affect its North Sea investments after all (Thursday) but oilfield services companies like Baker Hughes are having a tough time (Thursday) despite the oil companies they work for making an absolute killing!
• IN OTHER COMMODITIES NEWS – Tata Steel UK made its first pre-tax profit for 13 years (Thursday) but then its owner, Tata Group, threatened to close the Port Talbot steelworks (Friday) if it doesn’t get £1.5bn of aid from the government to help it cut carbon emissions.

Meanwhile, in the wonderful world of crypto,

• The Dutch central bank just fined crypto trading platform Binance €3m (Tuesday) for offering services without proper registration. This is a bit of a token amount and it’s interesting to see that some regulators are welcoming Binance with open arms (e.g. France, Spain, Italy) while others (Netherlands, UK) are less keen.

• The Farnborough Airshow went ahead for the first time in four years (Monday) and we saw Delta announcing a big order (Tuesday) and BAE said it would be working with Japan on the Tempest fighter project (Tuesday).
• Rolls-Royce announced it is trialling hydrogen-powered engines (Monday). These will be ground trials for the moment but it will be interesting to see whether this technology could be at all viable.
• US airlines are benefiting from selling airmiles (Thursday) and they are also making money again (Friday), although they just can’t keep up with demand. On the other hand, European flight demand is being hit badly by travel chaos (Thursday) and there has been a notable drop-off in demand.

• Consumers continue to face higher prices. Supermarket inflation in the UK hit a record 10% high (Wednesday), according to the latest Kantar stats and there is evidence of shoppers buying more own-label products to cut costs and switching to German discounters Aldi and Lidl in greater numbers.  Consumer staples companies like Premier Foods are still able to pass higher prices onto customers (Thursday) and people are still buying “affordable” treats at Hotel Chocolat (Wednesday) but they are not staying in to watch Netflix (Wednesday) and ordering in on Deliveroo (Tuesday), which announced a profit warning. Consumers are also reluctant to buy big ticket items like furniture from Made.com (Wednesday), which cut its annual sales guidance as it announced its third profit warning since listing last summer.
• IN RETAIL NEWS – Frasers Group is seeing booming profits (Friday) and is planning on opening more stores while Joules had some good news for a change (Wednesday) as it increased full-year profit forecasts and bolstered its borrowing capabilities whilst still cutting costs. In grocery retail, Amazon is now price-matching with Tesco (Monday) and Ocado is thinking of slowing down its UK expansion (Friday) as consumer spending on online grocery shopping is slowing down.
• IN REAL ESTATE NEWS – disgruntled Chinese tempers flared as they threatened mortgage strikes (Wednesday), which seemed to have the desired effect as a bailout fund was set up for property developers (Thursday). Meanwhile, embattled China Evergrande is fast-approaching a deadline to come up with a proper restructuring plan (Thursday), something everyone will be watching closely as many will want to know what exactly it’s going to do about its mahoosive $300bn (yes, that’s BILLION) debt. In the UK, a report from commercial property agent Lambert Smith Hampton says that we need a major overhaul of shopping centre developments (Thursday) as the pandemic has changed behaviours for the long term. In the residential property market, house prices have surged as buyers race to get “cheap” mortgages (Thursday).

• Amazon bought US healthcare provider 1Life Healthcare in a deal worth $3.9bn (Friday), which will give its existing healthcare business, Amazon Care, a major boost.
• Chinese ride-hailer Didi got a $1bn fine for breaches of data laws (Friday) as part of the ongoing big tech crackdown in China.
• Glassdoor was on the wrong end of a potentially terminal judgment (Wednesday) as a California ruling ordered it to unmask its anonymous reviewers as part of another case. I say this could be terminal because it lives on its reviews, and I think that it will get far fewer reviews if people have to use their real names.
• IBM had decent Q2 results (Tuesday) thanks to decent sales growth.
• IN SOCIAL MEDIA NEWS – Snap posted its weakest ever sales (Friday) as it continues to suffer from falling ad revenues since Apple changed its privacy policy. Also, the Twitter/Musk case has been fast-tracked and legal proceedings will commence in October (Wednesday). Musk may have been hoping to drag things out to put more pressure on Twitter’s share price.
• Big Tech companies signed up to Indonesia’s strict content law (Friday) that will allow content censorship and give access to user data. Signatories include Apple, Microsoft, Google, Amazon, Netflix, Spotify, Meta, TikTok and Twitter who all seem to be willing to partially ditch their “free speech” morals because Indonesia is such an enticing market.

• IN CAR NEWS – Tesla profits took at hit thanks to China factory shutdowns (Thursday) and Baidu overtook Tesla on autonomous vehicle development (Friday) as it announced plans to launch a robotaxi service in 2023, a year before Tesla is planning to. Volvo got a step closer to 100% electrification (Thursday) as it sold a higher percentage of EVs versus total sales. Meanwhile, UK car dealership Pendragon announced strong half-year results (Thursday) as new car shortages strengthened margins.
• IN FINANCIALS NEWS – Bank of America managed to limit downside in its results (Tuesday) thanks to the resilience of its retail banking business but Goldman Sachs warned of job cuts (Tuesday) as investment banking revenues fell. Meanwhile, Australia’s ANZ put in an offer to buy Suncorp’s banking arm (Tuesday) to boost the size of its mortgage book. In the UK, it was interesting to see that Direct Line issued a profit warning (Tuesday) as inflation pushed up the cost of motor insurance claims.
• IN MEDIA NEWS – Advertising company S4 Capital issued a profit warning (Friday) in another sign that advertising generally is weakening significantly as we enter a global economic slowdown. There was good news for The Guardian as it announced its strongest results since 2008 (Thursday) and there were some interesting trends among young people – that Instagram is British teenagers’ #1 news source (Thursday) and that young people are abandoning streaming in increasing numbers in order to save money (Monday). They are increasingly turning to free options such as BBC iPlayer, ITV Hub and TikTok, according to research by Kantar.
• IN MISCELLANEOUS NEWS – the UK is going to boost its “catch-up” tutoring plan with new partnerships (Wednesday) to make up for all that learning lost during the Covid years, PwC is resisting pressure to split its business into audit and consulting (Monday) having announced record revenues, GSK’s spin-off of its healthcare business Haleon didn’t go well (Tuesday), Johnson & Johnson cut full-year guidance (Wednesday) as it blamed the poor macroeconomic background and stronger dollar and ASML announced very strong Q2 numbers (Thursday) as the company that makes the machines that make semiconductors has a fat order book.

• 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! 

My favourite “alternative” story of the week was Deliveroo creates special song to stop seagulls stealing food in ‘Chipwatch’ zones (The Mirror, John Bett) as it seemed like such a good idea!