Thursday 01/12/22

  1. In MACRO, CRYPTO & BUSINESS TREND NEWS, Jay Powell indicates calming in rate rises, Eurozone inflation falls, China problems persist, Japan & UK warn on Taiwan, crypto’s framework comes under scrutiny, biz leaders get more optimistic and Chinese companies change HQ
  2. In TECH NEWS, we look at Musk/Twitter/Apple/Meta, TikTok security concerns, Starlink for the UK and Google’s massive lawsuit
  3. In CONSUMER, RETAIL & LEISURE NEWS, wages drop, first-time buyer expectations get more desperate, Amazon and H&M get axing, Phase Eight’s owner eyes Joules, Mulberry warns, pubs have difficulty with a winter World Cup and Loungers ploughs ahead
  4. In FINANCIALS NEWS, HSBC cuts branches and Klarna has a bumpy ride
  5. AND FINALLY, I bring you a little-known fairy light fact and a superb Christmas tree decoration…

1

MACRO, CRYPTO & BUSINESS TREND NEWS

So Big Jay hints at slower rate rises, the Eurozone’s inflation surprises, China has its problems, crypto is in focus, business leaders change their tune and Chinese companies quietly change their HQ…

📢 It’s Thursday, but unfortunately I cannot do this evening’s call because I have to go to an event that only happens once a year. The call should be back again next week and the week after that (Thursday Dec 15th will be the final call this year and then there will be a BIG call at the beginning of January where I review 2022 and do a preview of 2023).

Did you know that there is a podcast to go with Watson’s Daily? In this podcast, I discuss two stories from the day’s edition in a bit more depth with a Watson’s Daily Ambassador, my mate Ralph (on the Weekly podcast) or a special guest. The idea of this is to help to give you more of an idea of what talking about this stuff could sound like 👍 You can find the podcasts on the buttons below:

Fed poised to slow pace of rate rises (The Times, Mehreen Khan) shows that Jay Powell is saying that the magnitude of individual interest rate rises will be smaller than it has been in a speech he made yesterday. It has raised its interest rate by 0.75% on each of its past four meetings and although the pace of rises sounds like it will be slowing down, he said that the peak could be higher than investors are expecting in order to tame inflation. On the subject of inflation, Eurozone inflation falls more than expected to 10% (Financial Times, Martin Arnold) cites the latest release from Eurostat which shows that a slowdown in energy and services prices helped to bring the rate of inflation down from 10.6% in October to 10% for November, versus market consensus of 10.4%. This will fuel recent speculation that the ECB will, like the Fed, make smaller interest rate rises going forward as their recent hikes appear to be bearing fruit.

China’s difficulties persist in the face of its current Covid wave in Guangzhou eases restrictions despite worsening Covid outbreak (Financial Times, Edward White, Sun Yu, Gloria Li and Primrose Riordan) as the southern manufacturing city of 18m inhabitants has relaxed restrictions on movement in about half of its districts just a day after Beijing blamed local governments for the civil unrest in more than 20 cities. However, China’s high youth unemployment stokes student Covid protests (Financial Times, Thomas Hale and Arjun Neil Alim) shows that the erratic and severe lockdowns have resulted not only in economic slowdown, but also youth unemployment of around 20% since the July lockdown of Shanghai, adding fuel to the fire that has led to recent protests. How Xi squandered a generation’s life chances (Daily Telegraph, Tom Rees) points out the challenges facing Chinese youth as housing affordability is hugely stretched, fewer people are getting married (economic instability, population controls that have led to more men than women) and job prospects are changing while the cost of living is skyrocketing, particularly in “tier one” cities like Beijing, Shanghai, Guangzhou and Shenzhen. According to Fathom Consulting, the house price-to-income ratio is even worse than the US and UK and it could take a couple on starting salaries 30 to 40 years to afford a house if they don’t get family help. * SO WHAT? * TBH, this situation doesn’t sound that much different to what’s going on over here (house prices/rents, anybody?) but I guess the main difference is that we don’t have the lockdown problem (at the moment). Still, 20% youth unemployment is worrying and you can understand why they are feeling so disgruntled. Regarding lockdowns, it looks like the main strategy of Beijing is to blame local governments on the disarray, perhaps sacrifice some key officials and then lift restrictions to make it look like it is taking control. Surely the government should swallow its pride and get foreign vaccines on board – I’m sure pharmaceuticals companies who are seeing vaccine sale fall will be more than willing to do a good deal!

Meanwhile, Japan and UK warn of ‘sharp destabilisation’ in security environment (Financial Times, Kana Inagaki) shows that both countries believe that there is a “sharp destabilisation” in the situation regarding China and Taiwan after British and Japanese forces completed a nine-day training operation called “Vigilant Isles 22” where they practiced taking back an island seized by enemy

forces. Japan’s Self Defense Force has been conducting military drills with other European countries including Germany, the UK and Japan are expected to sign a defence pact called the Reciprocal Access Agreement which will make joint exercises and logistical co-operation easier and Japan is going to boost its defence budget by 11% for the year to March 2024. Things are getting tense. * SO WHAT? * My worry here is that Xi could potentially use an invasion of Taiwan as a national rallying cry to distract attention from domestic youth discontent (and criticism of the management of the ecoonomy). This sort of thing has been done before elsewhere, so maybe joint exercises with countries in the region will be a deterrent (although that in itself could be used as an excuse for China to attack).

Then in EU crypto framework under scrutiny by policymakers after FTX collapse (Financial Times, Scott Chipolina and Akila Quionio) we see that MEPs, in a hearing at the European parliament’s economic and monetary affairs committee, were questioning whether the EU’s landmark Markets in Crypto-Assets (MiCA) legislation that is due to come into effect in 2024 actually goes far enough to prevent another FTX-type scenario from happening again. The hearing had actually been called in response to the FTX implosion. There have been high hopes for MiCA as it adopts EU-wide standards, seen to be stronger than each individual country having their own rules, but there are concerns now whether it should be further strengthened in light of recent learnings. As things stand at the moment, under MiCA, crypto firms would have to be authorised by a single EU member state regulator before its services could be passported across the block. ECB says bitcoin is on ‘road to irrelevance’ amid crypto collapse (The Guardian, Alex Hern) highlights what the ECB really thinks about bitcoin as it said that it is on an “artificially induced last gasp before the road to irrelevance”, whilst also saying that it is a haven for illegal transactions that could dent the reputations of any banks that get involved. * SO WHAT? * I still think that it is very strange as to why bitcoin has been so stable while its world crashes around it. Is this big players trading with each other to keep the party going? There will be a large number of investors who do not want to see bitcoin go to zero, so you could imagine this is possible. As for regulation, it seems like the current rout is doing the regulators’ jobs for them. Will they just let it all wither and die and THEN bring in the big guns of legislation when the likes of Binance etc. are a shadow of their former selves??

There are some interesting business trends emerging at the moment – ‘We were too gloomy’: Europe’s business leaders turn more upbeat (Financial Times, Martin Arnold and Barney Jopson) shows that business leaders across Europe are starting to feel more confident as companies start to work through order backlogs and the German Ifo survey of business confidence bounced back in November while the eurozone showed resilient Q3 growth. All of this suggests that economists were too pessimistic in their predictions of a mild recession as they overestimated the impact of inflation on consumer spending and industrial output and underestimated the boost economies got as Covid restrictions fell away. Interestingly, the monthly EU survey of companies and households which was published on Tuesday this week showed that economic sentiment had risen higher than expected to the highest level in three months! Isn’t it nice to hear something positive for a change?!?

Then in Chinese companies set up in Singapore to hedge against geopolitical risk (Financial Times, Mercedes Ruehl and Leo Lewis) we see that up to 500 companies have redomiciled or registered in Singapore over the last 12 months, presumably in an effort to get around China-US tensions. Companies like Shein, Nio and IT services provider Cue have all been doing this on the quiet and although this is actually a well-trodden path, it has increased noticeably over the last year. * SO WHAT? * The exact number of companies that have done this is difficult to pin down because Singapore does not disclose a company’s country of origin in its public statistics. Still, it will be interesting to see whether Beijing decides to crack down on this (remember it has pretty much forced a load of tech companies to pull secondary listings in America in particular) and/or whether would-be trading partners in the west decide to turn a blind eye as part of the whole “Singapore-washing” charade??

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

2

TECH NEWS

Musk/Apple rumblings continue, TikTok looks tricky, the UK looks at Starlink and Google faces a big court case…

EU and US turn up the heat on Elon Musk over Twitter (Financial Times, Javier Espinoza, James Politi, Cristina Criddle and Hannah Murphy) shows that Musk’s recent push to make Twitter the platform of free speech has garnered the attention of the European Commission who threatened to ban Twitter unless it sticks to strict content moderation rules under the new Digital Services Act (DSA) and the US Treasury secretary Janet Yellen, who said that Washington was reviewing his acquisition because a Saudia Arabian prince’s ownership of a 3.5% chunk could potentially being seen as a “national security risk”. On the plus side, Elon Musk says Apple and Twitter have ‘resolved’ differences after meeting (Wall Street Journal, Tim Higgins) shows that a potential battle between the planet’s richest man and its most valuable company has been averted, at least for now, after Elon Musk and Tim Cook met at Apple’s HQ yesterday. Musk said the two had a “good conversation” and that they “resolved the misunderstanding about Twitter potentially being removed from the App Store”. Meanwhile, Mark Zuckerberg says Apple holds too much control over app ecosystem (Wall Street Journal, Sarah E. Needleman) shows that Zuck wanted to stick the boot in to Musk’s other beef with Apple – that it charges too much for access to its App Store. Talk about the pot calling the kettle black! How about Facebook’s stranglehold on advertising 🤣?? * SO WHAT? * I am increasingly of the opinion that this Twitter stuff is just noise, partly done to stir up publicity and partly to act as a distraction/delaying tactic while Musk forms a plan to revive Twitter’s future. Apple would potentially be shooting itself in the foot if it kicked Twitter off its store just as it’s about to launch a paid-for subscription, but then again if hate speech/misinformation spreading is allowed to go untamed it will have no choice. Given that Musk has said repeatedly praised the DSA (and that these rules should be applicable globally), you wonder whether his rantings are a clumsy attempt to get the lawmakers to give him more guidance so he doesn’t have to waste time developing something that won’t ultimately comply.

Elsewhere, TikTok’s China links stoke US security fears (Daily Telegraph, Gareth Corfield) shows that US Treasury Secretary Janet Yellen was also taking a pot shot at TikTok at yesterday’s DealBook conference, saying that there were “legitimate national security concerns” about the Chinese ownership of the social media app. The body responsible for looking into these matters, CFIUS, is led by Yellen and, with regard to TikTok, there are concerns about data sharing. * SO WHAT? * Is this just noise as well? Remember, it was only a few years ago that Trump threatened to shut it down or force it to sell itself (something that Beijing effectively torpedoed when it decreed that the intellectual property behind its algorithm would not be allowed to be part of the sale). Perhaps this is just a shot at Beijing that will ultimately come to nothing.

Then in UK to deploy Elon Musk’s Starlink in first test of satellite for rural connectivity (Financial Times, Anna Gross) we see that the UK will trial Elon Musk’s tech that will provide connectivity to a few specific areas, according to a government announcement yesterday. * SO WHAT? * Interestingly, the government has decided to use Starlink, operated by SpaceX, instead of the British option OneWeb, which it rather ironically rescued from bankruptcy in 2020 with a $500m injection! It was chosen for its availability and low cost and has not shut the door on others getting a look-in in future. Let’s hope that this is a price negotiation tactic and not a signal of the beginning of the end for OneWeb!

Then in Google hit with £13.6bn class action lawsuit over its advertising dominance (Daily Telegraph, James Warrington) we see that the internet giant has been hit with a class action lawsuit filed by the Competition Appeal Tribunal yesterday, claiming that it is too powerful in the online advertising market. The lawsuit is being brought on behalf of 130,000 businesses. The amount of money at stake here is equivalent to losses going back to 2014. * SO WHAT? * Given that Google controls up to 90% of the online advertising market, this move is somewhat unsurprising! It has already been fined €220m by the French competition authorities and is facing similar claims in Britain and America. It’ll be interesting to see what the outcome of this will be!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

3

CONSUMER, RETAIL & LEISURE NEWS

Consumers continue to face hurdles, retailers cut staff, Joules attracts interest, Mulberry warns, pubs are caught by a winter World Cup and Loungers ploughs ahead…

The poor old consumer continues to face challenges in Average worker gets a pay cut for the first time this century (Daily Telegraph, Eir Nolsøe), which cites data from the International Labour Organisation (ILO) that shows global salaries fell by 0.9% in real terms in the first half of this year and that UK workers are still worse off than they were 15 years ago! More specifically, First-time buyers expect to wait until late thirties to afford home (Daily Telegraph, Melissa Lawford) cites a First Direct survey which shows that UK consumers aren’t expecting to buy their first property until they hit 37! Interestingly, the actual average age of the first-time buyer is 32, but it has been slowly rising over the last few decades. The tough times continue…

Speaking of which, Amazon’s hardware teams first to face axe as tech giant downsizes (Financial Times, Dave Lee) highlights the latest development in Amazon’s bid to cut costs by reducing headcount by 10,000. Teams working on Alexa, Kindle and Halo were among the first to be dismissed following an annual review into the company’s business performance. There’s probably more to come…while H&M to axe 1,500 jobs as profits plunge at global fashion giant (Daily Telegraph, Matt Oliver) sounds the alarm for the clothing retailer as it announced cuts yesterday as part of another cost-saving exercise. This comes shortly after the company unveiled Q3 profits falling by a whopping 89%. This fall was blamed on the cost of withdrawing from the Russian market, rising inflation and falling demand. Most of the cuts are expected in Sweden. In very slightly more positive news, Phase Eight owner eyes Joules deal (The Times, Helen Cahill) shows that Foschini Group, the South African retail group that owns Hobbs and

Whistles, is now sniffing around Joules with a view to buying most of its stores and assets after it fell into administration a few weeks ago.

Then in Mulberry warns rich shoppers shunning London for Europe (Financial Times, Abby Wallace and Sarah Provan) we see that the posh bag company is warning that doshed-up shoppers are heading to the Continent and not London following the scrapping of tax-free shopping in the UK, a pattern that Burberry has also found. Mulberry posted a half-year loss, which resulted in the share price falling by more than 11% in trading yesterday. * SO WHAT? * Luxury is expected to continue to do well, but I think Mulberry is at the bottom end of that, so maybe it is slightly more vulnerable than, say, the likes of Chanel. It’s difficult at this stage to tell whether this is a one-off or whether it is a phenomenon that will spread.

In the leisure sector, Pubs caught offside by the switch to a winter World Cup (Daily Telegraph, Oliver Gill) shows that the World Cup-fuelled boozy bonanza that pubs were hoping for has fallen short of expectations as cold weather has kept more drinkers at home (presumably this has been better for supermarkets and other booze-sellers) while Resurgent Loungers refuses to rest on its laurels (The Times, Dominic Walsh) shows that the owner of Cosy Club and Lounge is keen to wake investors out of their stupor to give this company the valuation it deserves given its strong performance and its growth prospects. * SO WHAT? * Its share price is currently below its IPO price, but maybe this is for a reason. As an investor, do you want to buy into a restaurant chain that’s expanding at a time when household budgets are being squeezed? I actually think it’ll do OK as going there is not expensive enough to be prohibitive, but it’s special enough to consider going out when you feel the need.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

4

FINANCIALS NEWS

HSBC shuts branches and Klarna faces tough times…

In a quick scoot around other interesting stories today, HSBC to shut quarter of branches in online shift (Daily Telegraph, Chris Price) shows that the bank will close 114 of its UK branches from next April, affecting about 100 jobs. * SO WHAT? * This is down to the usual explanation of more people using digital banking, but it is also down to ongoing pressure from its biggest shareholder, Ping An, which wants HSBC to split off its more profitable Asian business.

Klarna aims to return to monthly profitability in 2023 as losses double (Financial Times, Siddharth Venkataramakrishnan and Richard Milne) shows that the Swedish payments company is getting hopeful about next year and that it will return to profitability for the first time since 2020. Its valuation has fallen from a peak of $46bn to $7bn in a funding round in July, having suffered from the

big tech sell-off and a tightening in lending. The cull of unicorns is just getting underway (Daily Telegraph, Ben Marlow) offers a rather less charitable outlook for the BNPL specialist, that the shortfalls in its business model are now coming home to roost. * SO WHAT? * Given that it is having to deal with worsening economic conditions, growing interest from regulators, increased competition from established lenders – and the likes of Apple, Shopify and PayPal – it looks like its glory days are well and truly over. The article argues that things could go either way with Klarna – that it could do well as it provides a way for cash-strapped customers to cope with limited finances, or it could fail miserably as consumers decide instead to go to more traditional and well-established rivals. FWIW, I maintain that I think the thing that would make the most sense is a bank to buy it for its BNPL tech and its younger customer base.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

5

...AND FINALLY...

…in other news…

Well here’s something I never knew: People are just discovering what the red Christmas light is actually meant for (The Mirror, Grace Hoffman). Wow! And while you are still reeling from that, I have to say that I think this is a brilliant Christmas decoration: Shoppers rave about ‘iconic’ meal deal Christmas tree decoration and try to guess flavour (The Mirror, Grace Hoffman). OK, so it’s not traditional, but it is quite amusing 😁…

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Some of today’s market, commodity & currency moves (as at 0633hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
7,573 (+0.81%)34,589.77 (+2.18%)4,080.11 (+3.09%)11,468 (+4.41%)14,397 (+0.29%)6,739 (+1.04%)28,260 (+1.09%)3,165 (+0.45%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$79.913$86.382$1,781.851.209701.04421136.3861.1584817,095

(markets with an * are at yesterday’s close, ** are at today’s close)