Thursday 06/07/23

1. In MACRO, OIL & BUSINESS TRENDS NEWS, the US reiterates that rate rises will return, Xi takes credit for Putin, Eurozone producer prices fall, UK interest rates could rocket, services sector momentum slows, UK borrowing costs rise and we battle against the US’s IRA while Russian oil revenues fall, Saudi Arabia takes over sports and Moderna does a deal in China
2. In TECH NEWS, India aims for chip production in 18 months, Threads launches and authors take on AI
3. In REAL ESTATE AND AUTOMOTIVE NEWS, UK house prices fall more than others, cash buyer activity increases and things look bleak for Canary Wharf while US new vehicle sales rise, China corners nickel, Nikola delivers, Europe refuses to relent on UK EV imports, we look more closely at solid-state and EV repair bills are likely to rise
4. In INDIVIDUAL COMPANY NEWS, Legal & General sees a jump in premiums and AO World does nicely
5. AND FINALLY, I bring you a couple of dad jokes…

So US rate rises look likely to resume, China holds Russia back, Eurozone producer prices slow, we look at UK headwinds, Russian oil, the Saudi assault on sport and Moderna’s China deal

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:

US Federal Reserve signals that rate rises will resume (The Times, Robert Miller) shows that the Fed is poised to resume interest rate hikes after its latest pause, according to yesterday’s release of the minutes of the latest FOMC meeting while Xi Jinping warned Vladimir Putin against nuclear attack in Ukraine (Financial Times, Max Seddon, James Kynge, John Paul Rathbone and Felicia Schwartz) shows that China’s president personally warned Putin against using nukes in Ukraine back in March and that China is continuing to reiterate this message across all of its channels. Russia is highly reliant on China – and bilateral trade reached a massive $190bn last year as China bought more Russian energy and helped it to get hold of key tech, including microchips.

Meanwhile, Eurozone producer prices fall into negative territory for first time since 2020 (Financial Times, Valentina Romei) cites Eurostat data which shows that factory gate prices (the prices that are charged by factories to wholesalers) fell by 1.5% in the year to May, its first fall since December 2020. This is one of the indicators of eurozone inflation and it has fallen significantly since last summer. This could indicate that the ECB interest rate cuts are starting to take effect.

The gloom back home continues in Stubborn UK inflation may lead to 7% interest rates, economists warn (The Guardian, Richard Partington) as some economists reckon that our situation regarding inflation is so bad that interest rates may need to go as high as 7% and Services sector expansion slows as higher inflation takes its toll (The Times, Martin Strydom) highlights a slowdown in the rate of expansion in the latest quarter of our all-important services sector, although it is actually proving to be relatively robust in the fast of major headwinds in the form of rising interest rates. UK sells £4bn of debt at highest 2-year borrowing cost this century (Financial Times, Mary McDougall) shows that we had to pay the highest borrowing cost on two-year debt since 2007 as expectations of further interest rate rises gather momentum.

In environmental matters, Britain warned of ‘big threat’ it faces from US green subsidies (Financial Times, George Parker) shows

that one of the chancellor’s key advisers, Lord Richard Harrington (who is currently leading a review on how to increase foreign direct investment into the UK) says that there’s a big threat from across the Pond from the massive subsidies the Americans are able to dish out to attract green investment. Essentially, we can’t match the money, so we’re going to have to offer something else to entice inward investment. Lord Harrington is due to publish his report in September.

In Russian oil and gas revenues tumble as war costs take toll (Daily Telegraph) we see that Russia’s oil and gas revenues shrank by 26% last month as lower oil prices and dwindling gas flows to Europe made their mark. Tax receipts from the oil and gas industry are key earners for the Kremlin and the sudden drop-off of gas exports to Europe hit revenues the most as gas export duty collapsed by 86%!

In business trends news, Saudi Arabia set to launch multibillion-dollar sports investment group (Financial Times, Samer Al-Atrush and Samuel Agini) highlights intentions by Saudi Arabia’s Public Investment Fund to launch a multi-billion dollar investment vehicle to grow its sporting interests after major moves in golf (LIV Golf, PGA) and football (Premier League). Tennis is also on the cards for investment, among other sports. Qatar and Abu Dhabi have invested in sports in the past and benefited from it. * SO WHAT? * I think that investment in sport is an excellent way to burnish a company’s image IF said country is “allowed in”. Given the parlous financial state of many sports these days, I think that there will be many who will be doing what they can to attract Saudi money and everyone will be second-guessing who’s going to be next to get their hands on all that cash. I guess that the sport(s) will have to be prestigious, at least relatively glamourous and get world coverage in order to help push Saudi Arabia’s reputation and would ideally be something that the Saudis do – or can do – themselves. I personally think that cycling could be a beneficiary and could do with some money being spread around (I would have thought that more involvement in the Tour de France, for instance, could be attractive although maybe the doping aspect may make them a bit reticent). I also wonder whether they could take a sport like rowing, for instance, and REALLY push it to MAKE it a global sport. That way it could control the narrative even more.

Then in US biotech Moderna strikes deal to develop mRNA drugs in China (Financial Times, Donato Paolo Mancini and Hannah Kutchler) we see that US drugmaker Moderna has signed a deal with Chinese authorities to research, develop and manufacture mRNA drugs exclusively for the Chinese market that will not be exported. * SO WHAT? * This is an interesting development and is another reflection of just how keen drugmakers are to get a proper foothold in China. Given the pretty mediocre efficacy of China’s Covid vaccines and the huge success of Moderna’s over the pandemic, I think something like this was bound to happen. I wonder whether there will be more to come…

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!

India does chips, Threads launches and authors take on AI…

India aims to produce first semiconductors within 18 months (Financial Times, John Reed) shows that the country will start building its first semiconductor assembly plant in August with a view to the first chips rolling off the production line by the end of 2024. US semiconductor company, Micron Technology, is setting up the plant in Gujarat. It is a $2.75bn project and has government support. Impressive! * SO WHAT? * I would have thought that this is good for both sides as India gets a brand new “hot” industry and Micron gets a bit of a much-needed boost after effectively being kicked out of China. Whether India will be able to keep up with the likes of Taiwan, Japan and the US who all have established expertise, is something that only time will tell!

Then in Threads app: Instagram owner’s Twitter rival logs 5 million users in first hours (The Guardian, Dan Milmo) we see that Meta’s “Threads” app has launched in 100 countries on the Google and Apple stores but Meta’s Twitter rival’s launch in EU delayed over privacy (Daily Telegraph, James Titcomb) highlights the fact that it has not launched in the EU because of privacy concerns. Users will need to have an Instagram account to log in and once they’re in they can choose to follow the same accounts that they follow on Insta – if they are also on it. It looks a lot like Twitter but uses different terminology – e.g. tweets are “threads” and retweets are

called “reposts”. Posts can be up to 500 characters long (it’s currently 280 for most Twitter users) and videos of up to five minutes can be posted while a post can be shared via a link on other platforms. * SO WHAT? * Zuck is launching this at a tricky time for Twitter and although I’m sure there will be an impressive uptake as people will be curious to see what the fuss is all about, I think that the real test will be when Twitter launches a counter-offensive. This could prove to be a Zucker-punch to Twitter’s ambitions (sorry, I couldn’t resist that).

Authors file a lawsuit against OpenAI for unlawfully ‘ingesting’ their books (The Guardian, Ella Creamer) heralds a lawsuit being brought by two authors against OpenAI, who they allege trained ChatGPT on their novels without their permission. The class action was filed in the San Francisco federal court and calls for monetary damages for all US-based authors to be paid by OpenAI, who they said “unfairly” profits from “stolen writing and ideas”. They said they had proof that training had occurred because when ChatGPT was asked to summarise their novels what came out was very accurate. * SO WHAT? * This is interesting because it will be the first lawsuit that concerns copyright on ChatGPT and will focus on the “borders of the legality” within AI. One potential stumbling block here is that it could be difficult to prove that authors have suffered financial losses specifically because of ChatGPT being trained on copyrighted material.

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!

We look at real estate trends, US new vehicle sales, China’s nickel domination, Nikola delivering, Brussels remaining unmoved, more about Toyota’s solid state breakthrough and even more costs for EV repairs…

In real estate news, Britain suffers worse house price fall than competitors (Daily Telegraph, Riya Makwana and Melissa Lord) shows that, according to a report from Knight Frank, we’ve suffered the worst house price falls of any other major European economy as rampant inflation and eye-watering mortgage rates put buyers off! House prices in the UK fell by 3.1% on an annualised basis for Q1 this year. Ouch. Mind you, it was interesting to see 70% of central London properties sold this year bought with cash – Savills (The Guardian, Rupert Neate) which would imply that there are a lot of rich overseas buyers wading into the market, according to research by estate agent Savills. The national average is 35%. In the office property market, ‘It has lost its appeal’: Canary Wharf faces an uncertain future (The Guardian, Julia Kollewe) is yet another doom piece on HSBC leaving Canary Wharf and that it could lead to some kind of exodus. * SO WHAT? * Landlord Canary Wharf Group (CWG) surely has a challenge on its hands as working practices have evolved during and since lockdown and I would have thought it would be no bad thing for the area to become less finance focused and broader in the types of tenants it attracts. I wonder whether it might be an idea to have rough zones so there could be some mini-clustering. At the moment, CWG says that 97% of its shops are occupied by tenants while commercial real estate firm CoStar reckons that around 15.5% of Canary Wharf offices are empty versus 11% in the City and just 6.6% in the West End.

In automotive-related news, U.S. New-Vehicle Sales Rise an Estimated 13% in First Half of the Year (Wall Street Journal, Nora Eckert) reflects a surprisingly strong set of numbers for car sales in the first half of the year, coming in way above market consensus despite ongoing interest rate rises and inflationary pressures. The numbers come from research firm Wards Intelligence, which posted estimates for GM (which were particularly strong), Honda and Hyundai and it says that pent-up demand was behind it. This is pretty impressive given the somewhat shaky economic backdrop!

Meanwhile, How China Came to Dominate the World’s Largest Nickel Source for Electric Cars (Wall Street Journal, Jon Emont) is a really interesting article on how China managed to come up with a process that meant that Indonesia’s nickel ore could be used for making EV batteries. Five years ago there were virtually no industrial nickel ore processing plants across Indonesia – but three have been built over the last few years! Indonesia has gone from producing virtually no nickel to being the world’s biggest source of the commodity in just five years! Clearly, this has tightened the stranglehold that China has on EV battery materials!

Elsewhere, Nikola’s Deliveries Rise While Production Falls Amid Manufacturing Pause (Wall Street Journal, Ben Glickman) shows that the embattled electric truck start-up said that its deliveries increased over Q2 but production almost halved as it had to stop in order to make modifications to its assembly line. Nice, but this is on a very small scale. It managed to deliver 66 trucks over Q2 via retail channels and 45 via wholesale – so this is not much to get too excited about!

Then in Brussels to stick with plan for post-Brexit tariffs on UK EV imports from 2024 (Financial Times, Andy Bounds, Peter Campbell and Peter Foster) we see that the EC isn’t budging on its intentions to impose tariffs from next year on EVs shipped between the UK and EU despite pressure from European carmakers and the British government. The current “rules of origin” require that EVs traded to Europe must have 60% of their battery and 45% of their parts by value overall sourced from the EU or UK or they will have a 10% tariff slapped on! The EC justified its intransigence, saying that the threat of the tariff would be an incentive to hasten battery manufacturing capabilities! * SO WHAT? * It has a point, but whether this is actually practical or not is another matter. At the end of the day, I would imagine that it means the higher costs will be passed onto the consumer, which probably means that sales will be weaker – especially when everyone is feeling the pinch. It is worth noting that the EU’s share of global investment in battery production has pretty much evaporated from 41% in 2021 to just 2% in 2022 after the US brought in the incentives in their IRA. The companies most likely to suffer in the short term are those who sell large numbers of vehicles in the UK, which would include the likes of VW, Mercedes and Ford. Tricky…

I thought I’d alert you to Between hope and hype for Toyota’s ‘solid-state’ EV batteries (Financial Times, Peter Campbell and Kana Inagaki) because it does a really good job of breaking down how batteries work and why the breakthrough I mentioned yesterday is so amazing. Virtually all current EVs are currently powered by batteries that have liquid lithium-ion batteries. The liquid electrolyte lets the current go through the battery between two electrodes (anode and cathode) which generates the power. Such batteries are heavy, take quite a long time to recharge and sometimes the liquid can catch fire – and this is extremely difficult to put out! Solid-state uses a solid electrolyte rather than a liquid one and is way more stable (so won’t catch fire), holds a lot more power (which means that batteries can be smaller without having to reduce range) and can charge very quickly. Toyota points out that it reckons its solid-state batteries will have a range of 1,200km, which is double what’s possible today – and you’d think that this will quash any worries of range anxiety! There have been false dawns with this before as it has been fiendishly complicated to make on a commercially viable scale, but Toyota is currently making all the right noises! Fingers crossed…

Then in Repair companies ‘quarantine’ electric cars (Daily Telegraph, Tom Haynes and James Warrington) we see that insurance costs for EVs could go through the roof as government guidelines that EVs with damaged batteries should be kept 15m apart in repair yards in case they spontaneously combust – which could add significantly to insurance bills. Who will be paying for these extra costs? You’ve guessed it – we will in the form of higher premiums 🎉! It is sobering to think that just two damaged EVs could fit into a space that would normally take 100 petrol or diesel cars under DVLA and transport department guidelines. More ouch. So if you ever wondered why your premiums are/might be going up, this is one of the culprits! Adrian Watson (no relation!) of Thatcham Research observed that some yards have special quarantining compounds and any EV goes in there for a week before they even touch it!

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!

Legal & General increases premiums and AO World returns to profit…

In a quick scoot around some of today’s other interesting stories, Legal & General credits rate rises for record jump in premiums (The Times, Helen Cahill) we see that the FTSE100 insurer announced that its total annuity new business premiums had increased by a chunky 27% thanks to strong demand for lifetime and fixed-term annuities. It also saw a notable increase in the number of pension schemes looking to insure against their members living longer lives!

Then in AO World’s smooth return to profit (The Times, Isabella Fish) we see that the previously-embattled online electrical goods retailer bounce back into profit following a period of streamlining the business and overall restructure. There wasn’t much forthcoming about the specifics of the partnership with Frasers Group, which has recently become its second biggest shareholder…

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!

…in other news…

Slim pickings today for this section, but I thought I’d leave you with two dad jokes HERE. I’d give the first one a solid 7 out of 10 and the second perhaps 2 out of 10. What do you think??