Thursday 22/08/24

1. In BIG PICTURE NEWS, the Fed looks increasingly likely to cut interest rates, France announces a spending freeze, UK borrowing and income tax receipts boom while Reeves is under pressure and gold storms ahead
2. In BUSINESS & INVESTMENT TRENDS, PwC faces a ban, China considers tariff retaliation, the MSCI cut more Chinese stocks and BlackRock edges away from ESG
3. In RETAIL NEWS, US consumers seek out the bargains, Sephora pulls back from China, Waitrose has expansion plans, Asda’s owners are under pressure and Shein considers its options
4. In MISCELLANEOUS NEWS, Ford gives up on an electric SUV, OpenAI opposes a Cali AI safety bill, the tech industry looks at old power stations and UK unions push for “pay restoration”
5. AND FINALLY, I bring you some bloke climbing a wall…

So the Fed moves towards cuts, France cools off, UK spending and income tax receipts rise, Reeves feels the pressure and gold gets stronger…

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 ‘ready to cut rates next month’ (The Times, Louisa Clarence-Smith and Mehreen Khan) shows that an interest rate cut at the Fed’s next meeting is looking increasingly likely as the publication of the most recent meeting’s minutes shows that the majority of officials want to reduce them. * SO WHAT? * Although a 0.25% looks most likely currently, if the labour market shows signs of deteriorating, a 0.5% cut could be on the cards. FWIW, I don’t think that the Fed can get away with delaying rate cuts ahead of an election like the Bank of England did to head off any accusations of political bias, so I would expect a cut next month also.

In Europe, French caretaker PM outlines spending freeze in ‘reversible’ 2025 budget (Financial Times, Adrienne Klasa) shows that France’s caretaker government is going to put a freeze on state spending whilst simultaneously conceding that a new PM chosen by President Macron could undo it. Outgoing PM Attal has been forced into this unusual position because the elections in July resulted in a hung parliament, meaning that no one group has an overall majority. France has been under a lot of pressure to rein in its public spending as its deficit, which was wider than expected last year being 5.5% of GDP versus the forecast of 4.9%.

Back home, UK borrowing hits four-year high – what does it mean for the economy? (The Times, Jack Barnett) shows that public borrowing has exceeded the OBR’s estimates quite considerably. This means that it is much more likely that chancellor Reeves is going to implement a number of tax rises in the Budget that is due on October 30th as part of plans to get the debt burden trending down over the next five years and balancing the current budget.

On the plus side (for the government), Income tax receipts hit highest July figure in 16 years (The Times, Jack Barnett) highlights a useful amount of money coming in, the highest figure for July since records began in 2008 – and shows just how much the government has come to rely on the money generated from freezing tax thresholds for a number of years (the idea being that wage rises combined with tax thresholds remaining static mean that more people breach those thresholds over time – something referred to as “fiscal drag” because people are “dragged” into paying higher taxes).

So What personal tax rises might Rachel Reeves introduce to ease UK deficit? (The Guardian, Hilary Osborne) has a go at identifying which taxes are most likely to rise. Inheritance tax (the tax paid on someone’s assets after they die, which could rise by reducing the number of exemptions), capital gains tax (the tax paid on profits you make when you sell – or give away – something that has gone up in value and is worth over £6,000. It’s possible that thresholds could be hiked to be in line with income tax). It could also raise money by changing the lifetime allowance for pensions (the limit you can build up in your private pension scheme – the government could reintroduce a cap, something that the previous government removed) and updating pensions relief (a tax break whereby the government boosts your contributions – which could be changed to cut the relief available to higher and additional-rate taxpayers). Also, Pressure grows on Rachel Reeves to end two-child benefit cap in next budget (The Guardian, Kiran Stacey) shows that the chancellor is under increasing pressure after campaigners say that keeping the current cap in place will mean that hundreds of thousands of kids will remain in poverty. * SO WHAT? * The fact is that Reeves faces a lot of hard choices and now she’s in the driving seat she is going to have to get used to the idea of not pleasing everyone all of the time. No doubt we’ll see a lot of further debate over the coming weeks as campaigners lobby the government to get their voices heard over everyone else!

In commodities news, Gold hits record highs as investors bet on rate cuts (Financial Times, Leslie Hook and Harry Dempsey) shows that Western investors have been major buyers of gold in expectation of US interest rate cuts this year. * SO WHAT? * This is particularly interesting because over the current 20-month rally, it’s actually been the Chinese who have been buying as they seek out a safe haven from their ailing economy and dodgy real estate problems. Lower interest rates mean lower borrowing costs which increases the attraction of gold relative to other assets.

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!

PwC faces a ban, China fights back, the MSCI cuts more Chinese companies and BlackRock moves away from ESG…

PwC braced for 6-month ban in China over Evergrande audit (Financial Times, Stephen Foley, Cheng Leng, Eleanor Olcott and Wenjie Ding) shows that PwC China has told clients that it is bracing itself for a six-month ban on doing business that will potentially start in September for its part in the collapse of property developer Evergrande (it was the auditor!). A hefty fine is also likely to be in the offing. * SO WHAT? * This will be the biggest penalty ever in China against a Big Four firm and it will no doubt put a spotlight on the role played by auditors in financial scandals, particularly in the ailing property sector. The ban is going to be painful for PwC Zhong Tian (aka “PwC China”) particularly as it was the country’s biggest accounting firm by revenue in 2022. It will prevent the company from signing off on financial results and IPOs whilst also restricting them from taking part in other activities. In practical terms, though, the company will continue to operate under the suspension and will be able to certify audit opinions once more for 2024 annual reports once the ban gets lifted again in March. TBH, given the scale of Evergrande’s debts this was always going to happen. I would also suggest that this could be part of a broader clampdown on non-Chinese businesses and perhaps even a prompt to domestic rivals to up their game to reduce reliance on foreigners.

In China begins anti-subsidy investigation into European dairy imports (The Guardian, Jennifer Ranking and Lisa O’Carroll) we see that the China Chamber of Commerce to the EU announced yesterday that it will be launching an anti-subsidy investigation of its own into European dairy imports as trade tensions between the EU and Beijing intensify. China said it would be looking into 20 subsidy programmes that help the production of milk, cream and cheese in eight EU countries. * SO WHAT? * My first thought when I saw this headline was “Here we go!”. Given that the EU has slapped taxes on EVs imported from China, retaliation was bound to happen. At the moment, the investigation looks (to me, anyway)

a bit low-key – but it certainly has the potential to be escalated should the Chinese be so minded! It is a threat that can be kept in China’s back pocket for future negotiations.

In investment trends news, MSCI axes dozens more Chinese stocks from global indices (Financial Times, Julienne Raven Lingat and Ignites Asia) shows that the MSCI index giant has ditched dozens of Chinese companies from its MSCI Global Standard indices in its latest quarterly review. This will give it room to increase the weighting of other emerging markets, such as India. * SO WHAT? * OK so this sounds boring – but it is important because funds around the world follow the indices provided by MSCI. When they ditch companies from their indices, tracker funds then have to sell those companies that they hold in their portfolios and buy whatever the new constituents are that they don’t currently have. It also reflects ongoing sentiment regarding China and other countries in the region.

Meanwhile, BlackRock’s support for ESG measures falls to new low (Financial Times, Brooke Masters and Kenza Bryan) highlights the ongoing cooling in sentiment towards ESG matters as a report released yesterday showed that the investment giant’s support of shareholder proposals on ESG issues has fallen dramatically from the 2021 peak. In the 12 months to the end of June, BlackRock supported just 20 of the 493 ESG proposals put forward by shareholders at AGMs – just 4%! That stands in stark contrast to the 47% rate of support in 2021. * SO WHAT? * ESG was the hot trend for many years, but after a number of developments – including various “greenwashing” scandals – in the last few years, there has been a rising tide of push-back against the “woke capitalism” agenda. Many hoped that investment giants like BlackRock could use their sway to persuade companies to do the right thing for the environment, but it seems that the backlash against this movement (e.g. BP and Shell notably rolling back their climate commitments) continues to gather pace and BlackRock has become noticeably less vocal.

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!

US consumers love a bargain, Sephora pulls away from China, Waitrose announces expansion plans, Asda’s owners come under pressure and Shein looks at options…

In retail trends news, Discount-Hungry Shoppers Propel Sales Gains for Target, T.J. Maxx (Wall Street Journal, Sarah Nassauer and Suzanne Kapner) shows that Target and TJX (the parent company of TJ Maxx, which is known as TK Maxx over here!) managed to post decent sales over the latest quarter although department store chain Macy’s reported yet another disappointing quarter. * SO WHAT? * I think that one of the more interesting takeaways here was that shoppers are now spending more on nonfood items. This would suggest that they are feeling more confident/have a bit more money to spend on things that aren’t just food. Walmart also recently said that sales of non-food items were increasing.

Then in Sephora cuts jobs in China in further sign of softness in beauty sector (Financial Times, Adrienne Klasa) we see that the beauty retailer has announced headcount reduction in China as it continues to struggle in the tricky mainland market. * SO WHAT? * OK so this represents less than 3% of its 4,000 workers in China, but it just goes to show how competitive and price-sensitive the beauty market has become in the country. Sephora is owned by LVMH and is one of its key profit generators, being very successful in North America, the Middle East and Europe. However, it has not enjoyed as much success in the Chinese market. Other brands including L’Oréal and Estée Lauder have also cited China weakness in their respective performances. I guess that more domestic competition and cheaper products on the likes of Alibaba and Tmall have taken their toll. Interestingly, Sephora has decided to stick with China whist exiting other markets in the region – notably Taiwan and South Korea – in the last 18 months.

In supermarkets news, Waitrose to open first new stores since 2018 (Financial Times, Rachel Banning-Lover) highlights new

store openings as part of a £1bn investment in expanding its presence on the UK high street. Waitrose is going to create up to 100 new convenience stores over the course of the next five years in addition to four larger branches. On the other hand, Asda owners under pressure as chain’s share of market hits ‘new nadir’ (The Guardian, Sarah Butler) continues to highlight the ongoing plight of the ailing retailer as the latest research from NIQ showed that it was the only Big Four supermarket to see sales fall in the latest quarter. * SO WHAT? * Re the Waitrose news, I think this is a sign that confidence is starting to return and that it is FINALLY concentrating on what it should have done all along – its core business of retailing! Obviously, we’ll have to wait to see how that goes but you’d expect it to be a nice boost to sentiment (especially for employees there who’ve had a rough ride in the last few years).

Elsewhere, Shein could sell shares directly to British public in £50bn London listing (Daily Telegraph, Michael Bow) shows that the online e-tailing giant is thinking about selling shares directly to retail investors in a potential £50bn stock market flotation in London. * SO WHAT? * Usually, offerings of this sort of size are only available to institutional investors but Shein’s bankers are looking at plans that would mean that retail investors could put their money in alongside all the investment giants. I have to say that if it decides to do this, I would interpret it as a sign of “no-confidence” in the flotation. This is going to sound somewhat blunt but I think that Shein is dodgy as, has massive potential litigation risk because it “allegedly” copies everyone else’s designs, has governance issues regarding employment and materials sourcing and has a dodgy structure (we all know it’s Chinese but it has its HQ in Singapore to try and get around the whole US-China trade war). As a result, I suspect that there may be resistance from the institutional investor community against a high price whereas a whole load of stock can be dumped on an unsuspecting group of retail investors – who probably have no idea of valuation (and why should they) – for a higher price because all they can see is its appeal to budget-conscious customers and its high profile expansion. We’ll have to wait and see!

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!

Ford ditches an electric SUV, OpenAI opposes a Cali safety bill, tech looks at power stations and UK unions push for “pay restoration”…

In a quick scoot around some of today’s other interesting stories, Ford writes off $1.9bn as it cancels plans for all-electric large SUV in US (The Guardian, Jasper Jolly) highlights another sign that sentiment towards EVs is slowing down rapidly as Ford has written off a chunky $1.9bn as a result of it deciding to cancel plans to launch an all-electric large SUV in the US. It also decided to postpone the launch of the successor to its F-150 Lightning electric pickup truck until 2027 (it was going to launch it in 2025!). It cited strong competition from the Chinese as a reason and will instead shift production weighting towards hybrids.

In tech news, OpenAI joins opposition to California AI safety bill (Financial Times, George Hammond and Hannah Murphy) shows that the parent company of ChatGPT is pushing back against an upcoming California bill that aims to make AI safer for users, putting its weight behind a campaign to block it. The company says that the bill threatens “California’s unique status as the global leader in AI” and could “slow down the pace of innovation, and lead California’s world-class engineers and entrepreneurs to leave the state in search of greater opportunity elsewhere”. * SO WHAT? * The legislation is called SB 1047 and has divided opinion into those who believe there should be safeguards in place for the development of AI and those who think it needs freedom to evolve and expand. The California State Assembly is due to vote on the bill by the end of the month. TBH, it seems to me that all this is doing is putting in writing what AI companies should be doing anyway. The likes of OpenAI are probably agitating to give them more developmental wiggle-room in the future IMO…

Staying with the subject of AI, Tech industry taps old power stations to expand AI infrastructure (Financial Times, Camilla Hodgson) is an interesting article which shows how the rapid rise in the demand for AI is prompting Big Tech companies to seek out sites for data centres to power AI. This is now meaning that they are having to widen their search to include old power stations and industrial sites because they have the necessary area and are designed to take a lot of power. This sounds interesting but could prove to be complicated depending on their size and whether or not they’ve been disconnected from the grid.

Then in Unions push for UK public sector ‘pay restoration’ in challenge to Labour (Financial Times, Jim Pickard) we see early signs of unions moving to consolidate their power as the Trades Union Congress looks likely to push for “pay restoration” from the new government to make up for a decade’s worth of public sector real-terms wage cuts. According to some estimates, in order to restore public sector pay to 2011 levels in real terms, wages would have to rise by a whopping 21%! * SO WHAT? * It sounds to me like this is just the beginning. Labour has traditionally been backed (and funded) by unions and one of the reasons why people may have voted Labour in the general election was their promise to sort out public sector pay. Public sector pay has clearly been falling behind in a big way but a sudden 21% redress is surely impossible with the country’s finances being in their current state. Even though there may be some negotiation now about this that may satisfy for now, the fact that the government is going to make is EASIER for industries to strike is surely storing up major problems for the future because the economy is going to go through ups and downs – and when it’s in a downturn, unions could turn the screws and make things very painful for the government. In the end, stronger unions will mean more strikes, more wage increases – and that will mean more taxes to pay for everyone. Let’s hope it doesn’t get like that.

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…

Did you watch any of the climbing at the Olympics recently? If so, you might recognise this guy. This looks absolutely incredible!!!