Watson’s Weekly 29-07-2023

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 when Spain couldn’t decide, Twitter rebranded as X and Spotify increased its prices!

• IN GLOBAL NEWS – the IMF upgraded its world growth forecasts, pretty much concluding that major economies are going to be largely unaffected by ongoing high inflation.
• IN CHINA NEWS – the country’s leaders have vowed to take action to boost its “tortuous” economic recovery and talked in broad terms about taking measures to stimulate consumer spending, employment and the real estate sector. The world (and particularly mining companies, as you’ll see!) needs China to pick up…
• IN US NEWS – the Fed increased interest rates again this week by 0.25% to 5.5% – its highest level since 2001! It does look like we are approaching the peak, though, and US economic growth picked up in Q2, according to the latest figures.
• IN EUROPEAN NEWS – the ECB also raised interest rates by 0.25% to 3.75%, also the highest level since 2001. It was well-flagged and it was interesting to see that it left the door open for a pause at the next meeting. Brussels is also looking at ways of shipping grain from Ukraine through Europe now that Russia has let the Black Sea Grain Initiative lapse. The IMF reckons Germany will see economic contraction and the latest Ifo survey shows that business confidence has worsened for the third month in a row. Spain’s election result was inconclusive, meaning that if agreement can’t be reached soon, there will be another election in December or January. The power vacuum will make things more complicated at a difficult time but at least the far-right didn’t get a mandate to get into power. European politics certainly seems to be moving to the right these days…
• IN UK NEWS – although UK stocks rallied after last week’s better-than-expected inflation news, the EY-Item Club is convinced that we’re facing two years of economic stagnation while bosses blame stubbornly high inflation on the rising wage trend.

IN OIL AND GAS NEWS…

• It turns out that Shell and TotalEnergies profits have shrunk thanks to falling oil and gas prices.
• Meanwhile, British Gas announced its best-ever H1 profits thanks to the price cap increase.

IN MINING NEWS…

• Anglo American has been hit by sluggish demand from China, which is the world’s biggest consumer of most commodities, and saw its net half-year profits plummet by 66%!
• Rio Tinto also saw its profits dive – by 43% – for the first half of the year. It makes most of its money by mining iron ore in Australia and selling it to the Chinese, who use it in steelmaking. As I said above, demand from China has not been great.

IN ENERGY NEWS…

• A battery storage plant near Manchester just got approval and it is projected to have the capacity to power over 500,000 homes for up to two hours when it’s finished. If developer Carlton Power can get the money together, construction can start early next year and it will be online by late 2025.

IN BUSINESS TRENDS…

• UK economic activity is slowing down, according to the latest S&P Global/CIPs survey with interest rates putting the brakes on consumer spending while manufacturing activity also took a hit. Mind you, it was interesting to see that UK exports to the EU have risen – they made up about 52% of trade last year versus 50% in 2019!
• I’ve mentioned this before, but the theme of US management consultancies seeing work drying up in China continues to gather momentum as Chinese authorities intensify raids on these companies in the name of national security.
• In law firm news, Linklaters became the third magic circle law firm to report – after Allen & Overy and Clifford Chance – and it wasn’t pretty as inflationary pressures continue to take their toll. It was interesting to hear that headcount reductions at big law firms have been increasing since Russia invaded Ukraine but it has been kept relatively quiet thanks to NDAs and big pay-offs. The bounce-back in M&A activity can’t come quickly enough!

IN EMPLOYMENT TRENDS…

• A report by the Institute for Fiscal Studies said that London’s top earners have enjoyed the strongest pay growth in the UK since the beginning of the pandemic, widening the existing divide between London and the rest of the country.
• It was also good to hear that UK companies are getting more confident about hiring, according to the latest report by REC, despite the rising cost of debt and stubbornly high inflation!

IN THE TECH SECTOR THIS WEEK…

IN AI NEWS…

• Leading AI tech companies got together to form the Frontier Model Forum to ensure “the safe and responsible development of frontier AI models” by ensuring best practice. Anthropic, Google, Microsoft and OpenAI got together to promote safety research and the FMF will be a communication channel between the industry and policymakers. This is a major development IMO and it needs regulators to get together to take it on otherwise Big Tech will once again just end up doing what it wants. You can hear more about this in the podcast where I discuss it with Ralph!
• Microsoft unveiled higher sales and profits this week thanks to AI-related upgrades prompting higher demand for its cloud computing service. It said that PC demand was down, but Intel said that the fall in demand for PCs was slowing down.
• Both Sam Altman and Elon Musk have all sorts of AI initiatives on the go at the moment but we’ll have to see how they develop. Open AI’s Sam Altman launched Worldcoin this week as part of a project to scan everyone’s eyeballs so they can get a “proof of personhood”.
• British AI start-up Stability AI’s management problems continue as one of its top engineers left the business after just five months. The British “answer” to OpenAI is mired in problems at the moment.

IN OVERALL NEWS…

• Google’s sales jumped, which was a relief to the company as it had feared that ChatGPT would have destroyed its dominance in search.
• Apple is now facing a class action-style lawsuit with the UK Competition Appeal Tribunal, facing allegations that it colluded with Amazon to block independent Amazon sellers from offering discounted Apple products.
• The EU launched an antitrust inquiry into Microsoft about whether it is acting in an anti-competitive manner by offering Teams for free as part of its Microsoft 365 and Office 365 software suite.
• Meta Platforms posted its best quarterly sales growth since 2021 thanks to the rebound in advertising and its increasingly successful use of AI to target its ads. Facebook’s algo change hit the parent publisher of the Mirror and Express newspapers as its content got booted down the pecking ofers while Threads has been losing steam after the initial explosion in interest. It clearly needs to build on the momentum it got on launch – and the clock is ticking!

IN SOCIAL MEDIA NEWS…

• Twitter had a rebrand! It will now be called “X” as part of the transition to becoming an “everything app” as per Musk’s vision. It then promptly cut ad prices to attract advertisers!
• TikTok is about to launch an e-commerce business selling Chinese-made goods to American customers, which will mean that it will be competing with the likes of Shein and Temu. There’s still a cloud hanging over it regarding whether or not it TikTok will be banned in the US.
• NetEase is benefiting from the massive success of its accidental viral hit game “Eggy Party” and leaving rival Tencent in the dust.

IN MEDIA NEWS THIS WEEK…

• ITV warned of the “worst ad recession since the financial crisis” thanks to a tough market and the costs involved in setting up its ITVX service. The company is, however, cautiously positive about the rest of the year.
• Netflix is currently revisiting its advertising partnership with Microsoft. It was previously exclusive, but it hasn’t done that well, so now other companies can pitch on Netflix’s behalf in addition to Microsoft. Netflix has also cut some of its ad prices to drum up interest.
• Staying with the subject of ads, ad agency S4 Capital cut its forecasts for the full year due to exposure to digital advertising – and investors sent its share price tumbling by 20% on the news.
• Spotify increased its monthly subscription prices for the first time since it started 15 years ago and it also took a painful financial hit in Q2 from its very expensive (and not that successful) foray into podcasts as it ditched some of the famous names it signed up previously in an excited frenzy.

IN TELECOMS NEWS…

• Vodafone published a decent set of results despite falling customers numbers, thanks to implementing sharp price rises.
• Virgin Media announced a 10% headcount reduction as part of a cost-cutting exercise linked with its merger with O2 two years ago. It is trying to knock chunks out of the £20.2bn debt pile it amassed in the process!

IN CONSUMER GOODS NEWS…

• Adidas is actually doing OK from Yeezy sales! It sold its first batch of Yeezy sneakers since cutting ties with Kanye West, which is a result given that they were worried that they’ve have to just scrap the €500m worth of Yeezy stock they were left with when he had that anti-Semitic rant. The company aims to channel any profits to charities, royalties to West and pay the costs of severing links with the controversial rapper.
• Kering, which owns Gucci, bought a 30% stake in Valentino from Qatari fund Mayhoola, with an option to buy the whole thing by 2028. This is all part of efforts to spark its performance into life and catch up with rivals such as LVMH and Hermès!
• LVMH reported a slowdown in the US luxury market, although this was offset by the strong performance in Asia. Is this the beginning of the end of the stellar performance it’s enjoyed over the past couple of years? Or is it just a pause?
• L’Oréal said that it is looking out for further potential acquisition targets following its recent $2.5bn high-profile purchase of Aesop, the posh skincare brand. It wants brands that already have a track record but that also have global potential.
• IN CONSUMER GOODS COMPANY NEWS – Nestlé reckons that price rises will slow down this year, Reckitt Benckiser is getting more cautious about passing higher prices onto consumers but Unilever’s profits were powered by price rises and Coke is just going to put prices up regardless as consumers seem to be OK with absorbing the impact.

IN RETAILER NEWS…

• Amazon is offering to make concessions on third-party sales to get the UK’s CMA off its back. If the CMA accepts the concessions, it will be able to avoid the pain of a full CMA investigation.
• Frasers Group profits shot up by 40% thanks to younger shoppers buying products that help them stay “socially relevant” (!). On the flipside, more department store closures are on the cards as it believes that the format is “broken”.
• The BRC doled out the gloom as it said that even more shops are going to close on the high street because of forthcoming rises in business rates. They are set to rise by 30% in April next year, which could push more retailers over the edge.

IN LEISURE NEWS…

• Share prices of EasyJet, IAG, Tui, Wizz Air and Jet2 suffered as investors reacted to Greek wildfires and Tui cancelled flights to Rhodes.
• Heathrow managed to halve its losses but remains concerned about the impact of the cost-of-living on consumers while Ryanair saw summer profits almost quadruple thanks to higher prices and strong demand. How long will this last, though?
• Elsewhere, McDonald’s unveiled profits that rose faster than analysts had been expecting due to increased prices and more customers! Meanwhile, the release of Barbie and Oppenheimer over the weekend proved to be a massive boost to Vue cinemas – they could do with some good news, particularly as the impact of the Hollywood strikes are going to be felt further down the line.

IN EV & BATTERY NEWS…

• Chinese battery giant CATL announced record profits, consolidating its position as the world’s biggest EV battery maker. Meanwhile, a US battery start-up called Group 14 Technologies is looking to produce next-gen battery materials in Germany as carmakers desperately try to wean themselves off Chinese dependence.
• GM did an about-turn on its popular Chevrolet Bolt, which is had intended to stop producing. It will instead continue to produce it but put in newer battery technology.

IN OVERALL CAR NEWS…

• Toyota is struggling in China and it looks like the situation won’t improve any time soon. Honda, Nissan and Mitsubishi Motors are also in the same boat (or car, even 😁).
• VW announced that it spent $700m for a 5% stake in Chinese rival Xpeng. I guess it is thinking – if you can’t beat ’em, join ’em! It also cut its sales forecasts in China, its biggest market, although it did put in strong performances in Europe and the US.
• Stellantis said that it was going to make deeper cuts in order to compete with the Chinese.
• Ford raised its profit forecasts although it had big losses in its EV division due to having to cut prices to stay in the game while rivals (particularly Tesla) cut prices to increase volumes.
• JLR’s profits rebounded thanks to stronger sales of its core brands, freed-up supply blockages and a reduction in delivery delays.
• Among luxury marques, Aston Martin said that it expected to return to profit within the next few months but Bentley saw sales slip in the UK and China for the first half of the year and said it was cautious about the second half.

• Credit Suisse got slapped with a $388m fine for its role in the collapse of Archegos Capital, which caused a massive $5.5bn trading loss and pretty much engineered Credit Suisse’s ultimate failure.
• Rival Swiss bank Julius Baer managed to see chunky inflows of money thanks to Credit Suisse’s demise but it seems that investors were perhaps expecting more.
• HSBC became the first big lender to cut mortgage rates after last week’s surprise fall in inflation. Others soon followed!
• Lloyds Bank put aside more money to cover bad loans as it voiced concerns about increasing numbers of homeowners struggling to make their mortgage payments.

• IN REAL ESTATE NEWS – estate agent Foxtons saw higher profits as it benefited from higher rents, which more than compensated for the slowdown in house sales. In the office property market, concerns rose again about a Canary Wharf exodus as ratings agency Moody’s became the latest tenant to threaten to leave the area to cut costs.
• Aerospace engineer Rolls-Royce saw its share-price shoot up by over 20% on positive news for production, profits and the outlook. It has had a torrid few years, so this news was particularly sweet.
• Around 120,000 recent graduates are getting together to sue their universities for the disruption caused by Covid. The action is being backed by litigation funder TPRG Capital and the first uni under the cosh will be University College London. This will be very closely watched by the educational establishment given the potential repercussions.
• Then in the most ridiculous story I’ve heard for quite some time, online health and beauty platform THG had a moment of madness and announced it would be buying freesheet City AM. Whaaaaaaaaaaaaat???? I do not see any overlap here and do not understand the rationale. Maybe we’ll be enlightened at some future point…

My favourite “alternative” video this week was this brilliant superhero video!