Watson’s Weekly 27-04-2024

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 Senate finally passed the aid bill, when BHP suggested a mega-merger and when Congress approved a ban on TikTok…

• IN THE US – investors are starting to price in an interest rate increase as inflation came in stronger than expected and GDP growth numbers underwhelmed. The US Senate eventually passed a $95bn bill for aid to Ukraine, Israel and the Indo-Pacific region, in a boost for Biden as it got cross-party support.
• IN ASIA – the Bank of Japan kept interest rates unchanged, sending the Yen to its lowest level in 34 years while Indonesia raised interest rates to bolster its currency, which had hit four-year lows against the dollar.
• IN THE UK – the Bank of England’s chief economist, Huw Pill, warned against cutting interest rates too early while the latest ONS data showed that government borrowing came in above expectations. The FTSE100 hit a record high this week and although there may be potential wobbles near-term due to continued UK fund outflows, there are some pretty interesting catalysts further out that could really power the index forward from here. Meanwhile, debate continues as to the timing of the next UK general election. The general consensus would suggest that Sunak will leave it as late as possible in order to take advantage of potential good news on the economy but his hand might be forced by a poor performance in the May 2nd local elections.
• IN SPAIN – PM Pedro Sánchez threatened to resign as his wife has been caught up in accusations of corruption. He is due to make a decision on his future on April 29th.

IN COMMODITIES NEWS…

• IN MINING – BHP proposed a takeover of rival miner Anglo American in a transaction that could be the industry’s biggest for years! BHP is keen to get more copper exposure through the deal because it thinks that copper will be a key driver of the green revolution. However, BHP is going to have to put in a higher offer to stand a realistic possibility of getting the deal over the line.
• IN DIAMONDS – we see that output from Anglo American’s diamond business, De Beers, fell by a whopping 23% in Q1 thanks to a combination of a reining in of luxury spending and the rising popularity of synthetic diamonds. Although De Beers said that there were some signs of recovery over the quarter it does seem that the current oversupply of gems will limit upside for some time yet.
• IN LITHIUM – we see that Tianqi Lithium shares dropped by a whopping 19% in early trade on Wednesday in Hong Kong and by 10% in Shenzhen, the daily limit, after the Chinese lithium producer warned about widening losses caused by weak product prices and a tax dispute in Chile.
• IN OIL – Ithaca Energy agreed to buy almost all of Eni’s UK oil and gas fields for £750m, transforming it into one of the North Sea’s biggest producers. Eni will retain a 38% stake in the enlarged group.
• IN COCOA – Latin American farmers are now rushing to plant cocoa given the massive price rises over the last year. There is obviously a danger that, by the time the new plants bear fruit, prices will have normalised.

IN ENERGY…

• Data from National Grid’s electricity system operator (ESO) shows that the proportion of electricity generated in GB by burning fossil fuels fell to a record low of just 2.4% earlier this month. This is pretty amazing considering that 15 years ago, gas and coal power plants made up 75% of the electricity mix, with renewables accounting for just 2%.
• Schneider Electric is working on the development of the world’s first offshore charging station for cruise ships that would be sited off Orkney. Sounds great but a bit niche IMO!

IN BUSINESS TRENDS NEWS…

• Suez trade has dropped by 59% over the year to April thanks to conflict in the Middle East. Delivery times have obviously increased but they haven’t increased by all that much and are starting to fall.

IN EMPLOYMENT TRENDS…

• Tata Consultancy Services’ CEO said that AI could kill call centres – potentially within one year. We’ve already seen this starting to happen at Klarna.
• Some of the world’s biggest commodity traders, such as Vitol and Trafigura, are investing huge sums in AI that they use to process data and make faster decisions. Citadel is currently at the forefront, but others are throwing money at it to catch up.
• Chinese tech workers are getting hit by the “curse of 35” where employers are tending to favour younger over older workers, leaving the latter out in the cold. The problem is that this trend is across other industries, meaning that those affected by this find it very hard to find other work.

IN AI NEWS…

• The US is looking for an alliance with Abu Dhabi on AI as the US doubles down its efforts to get the UAE onside. After a big announcement from Microsoft last week, it’ll be interesting to see what other deals come of this push.
• China is continuing with efforts to come up with its own “ChatGPT”. SenseTime is the company that seems to be furthest ahead and just released the newest version of its chatbot, SenseNova 5.0, this week.
• The US is pushing for a tightening of existing tech exports to China (particularly of advanced chips and chip-making equipment) as it is getting concerned about the strides China’s Huawei is making.
• Microsoft’s efforts in AI are paying off as Q3 revenues came in way above Wall Street’s estimates thanks to gains from its exposure to AI via its cloud services and business software products.
• VC firm Sequoia committed to investing in Elon Musk’s start-up xAI. It is an investor noted for investing at the early stages of development for companies like Google, YouTube and Apple. Musk is trying to raise up to $6bn to catch up with rivals including OpenAI – a tall order, but if anyone can do it he can (let’s hope he manages to negotiate a water-tight bonus this time though eh 🤣).
• Meta’s share price fell on concerns about how much money it is going to have to spend on turning Meta into “the leading AI company in the world”. Slowing revenues and rising costs are turning sentiment on the company and trying investor patience.
• Meanwhile, Google owner Alphabet saw its valuation breach the $2tn mark after announcing that it would be paying its first dividend. It’s in the mix for AI supremacy but seems to me to be generally one step behind OpenAI.

IN TECH HARDWARE NEWS…

• The European regulators conducted a surprise raid on the Warsaw and Rotterdam offices of Chinese security equipment supplier Nuctech under the new anti-state subsidy rules. This didn’t go down well with China’s commerce ministry, who said that the raid was motivated by protectionism. No doubt there will be retaliation from the Chinese side.
• Intel disappointed investors with underwhelming Q2 forecasts. Basically, it’s seeing weaker demand for what it’s strong in – CPUs – while the demand for GPUs used in AI is booming.
• IBM put in an offer to buy cloud software company HashiCorp for $35 per share in cash, giving them access to the company’s 4,400 clients. The deal will be subject to regulatory approval but should close by the end of the year. Another M&A deal in the bag for the investment banks!
• LG Electronics’ profits rebounded thanks to steady revenue growth in home appliances and vehicle components. It now expects a gradual recovery in global demand for consumer electronics.

IN MEDIA NEWS…

• US Congress approved a bill banning TikTok from US app stores unless its owner, ByteDance, sells it. On the other side of The Pond, the EU threatened a ban on TikTok’s new TikTok Lite service under the new Digital Service Act for not offering enough protection to kids.
• Spotify reported record quarterly profits thanks to an increase in the number of premium subscribers and a clampdown on costs.

IN BATTERY NEWS…

• Global battery production is rising – but not fast enough, according to a report by the IEA. It also warned that huge amounts of energy storage would be needed globally by the end of the decade to ensure smooth clean energy transition.
• South Korea warned that China’s control (and virtual monopoly) over key types of graphite used in battery anodes means that Inflation Reduction Act restrictions will make it virtually impossible to cut China out of the supply chain. It’s also worried about whether subsequent administrations could just change the rules, so is seeking some kind of guarantee…
• Toyota announced a $1.4bn EV investment in its Indiana facility, meaning that it has now poured $18.6bn into its US manufacturing operations to advance its electrification efforts. The carmaker continues to play catch-up with everyone else in the sphere of EVs.

IN EV NEWS…

• Research from New Automotive suggests that the combination of huge overproduction of EVs and weakening consumer demand will mean that there will be an overhang of zero-emission vehicles over the next two years, which in turn means that the likelihood of price wars is high! Stellantis’ CEO says that the UK’s existing EV sales targets are unrealistic because they are “double the natural demand of the market”, which means that carmakers are going to be forced to sell vehicles at a loss to avoid hefty fines.
• Tesla’s having a tough time at the moment! It announced another round of price cuts, falling sales and the recall of 3,878 Cybertrucks to replace faulty accelerator pedals. It did, however, say that it would accelerate the rollout of its new “affordable” models but caused some nervousness by announcing ambitions to operate its own fleet of robotaxis (that some are referring to as “Cybercabs”).

IN OTHER CAR NEWS…

• Car production dropped by 27% last month, ending the six month run of growing output as production facilities continued to adjust to the manufacture of new electric models.
• GM raised its profit outlook for the full year after benefitting from demand for petrol-powered pickup trucks and SUVs and cutting investment in things like robotaxis. It unveiled a 24% increase in Q1 profit as a result.
• Nissan cut full year profit estimates as car sales numbers came in weaker than market expectations. Maybe its JV with Honda on EVs could help boost their fortunes…

IN CONSUMER NEWS…

• IN CONSUMER TRENDS NEWS – consumer confidence is recovering, according to the latest GfK survey, as falling inflation and tax cuts have helped to boost consumer confidence this month. Analysis by the Daily Telegraph showed that UK households have cut household spending the most in the 38-member OECD – apart from people in the Czech Republic. Hopefully there will be some relief, though, as UK grocery price inflation slowed down to its lowest level since November 2021. This is the 14th drop in a row and came in way lower than it did last month.
• IN CONSUMER GOODS NEWS – Mattel underperformed versus expectations in Q1 as the Barbie effect that boosted it last year faded. Reckitt Benckiser shares rose as sales and volumes came in above market expectations but there’s still litigation risk in the US over its Enfamil premature baby formula.

IN RETAIL NEWS…

• IN LUXURY – the sector has had mixed fortunes as Hermes, Moncler and Prada put in decent performances while Burberry and Kering showed weakness.
• ON THE HIGH STREET – Asda became the only one of the Big Four to see a drop in grocery sales over the last quarter, according to the latest stats from Kantar, as it sinks further into oblivion (like Morrisons IMO). Meanwhile, WH Smith said that it expected a busy summer, ABF got upbeat about its prospects for the full year and its apparel retailer, Primark, put in a particularly strong performance. Then we saw JD Sports striking a $1.1bn deal to expand in the US via an acquisition of Alabama-based chain Hibbetts. This is particularly notable given that it’s a Brit company taking over an American one (it’s usually the other way around!) and will double the number of its US stores at a stroke!

• The FTC is attempting to scupper an $8.5bn deal for US luxury goods company Tapestry buying Capri Holdings, saying that this could damage competition.
• City advisers, including Goldman Sachs and JP Morgan, are raking in £80m in advisory fees from the planned Nationwide takeover of Virgin Money. M&A is coming back!
• Consulting firms are continuing to streamline their operations after the boom of 2020-2022 led to over-hiring. I suspect that this will turn around relatively soon given that the M&A market is showing signs of returning!
• The CMA is looking into Big Tech’s AI deals, initially fielding views on whether partnerships between Big Tech companies and smaller start-ups are anti-competitive. It has already launched an investigation into whether Microsoft’s partnership with OpenAI could be considered a merger by stealth!

• IN FINANCIALS NEWS – the Bank of England is getting increasingly cautious about the rise of shadow banks given that they are unregulated, which means that there are no protections in place if things go wrong. Meanwhile, Revolut is looking at other ways of monetising its user base as it waits to get its banking licence and Lloyds Bank took a hit to profits as homeowners rushed to refinance their mortgages to take advantage of falling rates. This resulted in higher turnover in its mortgage business, which hit its profitability.
• IN REAL ESTATE NEWS – we saw that the value of Canary Wharf Group offices fell by almost £1bn over the last year thanks to the ongoing impact of the WFH trend and increased efforts of the City of London to attract companies. In residential property news, stats from Rightmove shows that asking prices for properties coming to the market in the four weeks to mid-April hit near record levels.
• The US FTC voted to ban non-compete agreements to avoid wage suppression and promote innovation. The US Chamber of Commerce announced it would fight back by suing the regulator. This will have major implications across many industries (like those in Wall Street, for instance!) and I wonder whether other jurisdictions will review their own policies in light of this development.
• Boeing hit major turbulence in Q1 as the company burned through a huge amount of cash ($3.9bn) over the quarter as it tried to address quality issues whilst it also saw a drop in deliveries, which is hurting income.
• Thames Water wants household bills to rise by a chunky 45% in order to finance investment in its ageing infrastructure. It’s just a proposal at the moment but the company is trying to avoid nationalisation…
• It was interesting to see that the Treasury and Investment Association declared in a joint statement that investment in defence companies will not preclude them from classifying themselves as “ethical” or “sustainable”. This statement was designed to support the UK defence industry that has suffered years of being excluded because of the ESG trend.

My favourite “AND FINALLY” video this week was the one about “The old man test”! I’ve still not tried it yet but I don’t fancy my chances 🤣