Tuesday 05/05/20

1. In MACRO NEWS, Trump brings up the China trade deal, Eurozone factory output slows right down while Europe and the UK wrestle with lockdown lifting
2. In AVIATION NEWS, there’s bad news for GE and good news for Norwegian Air
3. In CORONAVIRUS “WINNERS” & LOSERS, we look at who is “winning” and who isn’t
4. AND FINALLY, I bring you Darth Vader monitoring and the dog who interrupted the weather…

So Trump stirs things up, Eurozone manufacturing takes a hammering and Europe wrestles with lockdown easing…

US warns China to abide by its pledge on imports (Daily Telegraph, Lizzy Burden) shows that Trump is getting feisty again towards China. He is now saying that he would walk away from the first phase of the US-China trade deal signed at the beginning of this year if China doesn’t hold up its end of the bargain by missing import targets. It had promised to buy an additional $200bn of American goods and services over the next two years. * SO WHAT? * This sounds like classic Trump sabre-rattling. I reckon that he either thinks that the deal is probably dead and wants to go out looking like HE was making a stand or that he knows something we don’t and that China really needs US goods. There will be more theatrics to come, no doubt. That whole thing about the coronavirus coming from a Wuhan disease research lab sounds decidedly shaky to me given that he’s come up with zero evidence thus far. I think he’s just trying to sow enough seeds of doubt to keep the pro-China camp at bay.

In Europe, Eurozone factory output grinds to a halt (The Times, Gurpreet Narwan) cites the latest stats from IHS Markit’s purchasing managers’ index (PMI) which show that factory output in April fell through the floor. It was the weakest reading since the survey began in 1997 and reflects the effect of widespread factory closures as well as a collapse in both demand and supply. Italy and France were worst hit, but Germany wasn’t far behind. * SO WHAT? * This is obviously bad, but the danger is that the

real situation could actually be worse. Although it will probably rebound next month as more factories go online, factories won’t be able to ramp up fully due to difficulties in doing so whilst adhering to social distancing measures.

Staying in the region, Europe prepares to exit lockdown amid business and labour concerns (Financial Times, Victor Mallet, Daniel Dombey and Guy Chazan) shows that discord is emerging in Europe between unions and workers on one side and businesses and politicians on the other as countries try to find a way to get back to work whilst simultaneously not putting employees in harm’s way. Johnson ‘back to work’ plan puts UK business and unions at odds (Financial Times, George Parker, Jim Pickard and Delphine Strauss) shows that a similar thing is happening in the UK as well. Labour leader Keir Starmer is siding with unions saying that businesses should publish coronavirus risk assessments with tough penalties for employers who fall short in protecting their staff, but businesses say that this would be to complicated especially for smaller enterprises and want more commitment from the government to protect them from potentially massive lawsuits. * SO WHAT? * Let’s face it – NO-ONE wants to be blamed for any coronavirus deaths. Unions are doing the right thing by employees by protecting their interests (as they should) but in reality if they make things too complicated for businesses to restart by forcing them to adhere to all of their demands, there will be no businesses left. Governments around the world are faced with striking an unpalatable balance between exposing people to some risk and getting the economy moving. IMO, governments are in a no-win situation here because they will get blamed for all the things that go wrong and the critics will be vocal in their “I told you so’s”. They will just have to find the best balance they can and live with the consequences.

Well there’s good news and bad news…

Getting the bad news out of the way first, GE cuts 13,000 jet engine jobs in virus hit (Daily Telegraph, Laura Onita and LaToya Harding) highlights major job losses as the American firm decided to speed-up its cost-cutting programme originally announced in March. The cuts equate to about 25% of its global workforce. * SO WHAT? * When you consider that global air traffic is forecast to fall by 80% during the second quarter, you can see why GE is taking this decision. Speaking brutally, the whole industry is going to be downsizing and so if you were an industry exec, you are probably thinking that cutting staff will minimise damage to the company right now. If things go better than expected, they won’t be difficult to hire back because there will be so many trained staff out of work. This is just more evidence of how tough things are right now. There will be more to come I am sure.

On the plus side, Norwegian Air wins £230m lifeline as investors agree deal to swap debt for shares (Daily Telegraph, Oliver Gill and Simon Foy) shows that the budget airline has managed to get a state bailout after investors supported a major financial restructuring. This came at roughly the same time that France’s state bailout of AirFrance-KLM was approved by the European Commission. * SO WHAT? * This is a stay of execution for the airline that has the third biggest presence at Gatwick. Mind you, it was already looking financially shaky before the coronavirus hit because of the massive amount of debt it ran up to finance a very ambitious expansion programme. This isn’t just good for Norwegian, though – it’s good for Gatwick because they get to keep a major customer (for now, anyway!). Lufthansa and Alitalia are continuing negotiations for bailouts with their respective governments and this latest development will put more pressure on the British government to do something about British Airways.

There are some “winners” out there, but there are also a lot of losers…

So…in the winners’ corner, Run on toilets leaves Japanese lavatory makers flush with orders (Financial Times, Kana Inagaki and Leo Lewis) highlights an interesting beneficiary of the current situation as it wasn’t just demand for toilet paper that shot up in the wake of the coronavirus – it was actually demand for toilets themselves! In fact, the demand for them went through the roof from mid-March onwards as market participants placed ever-larger orders to ensure supply ahead of Chinese factories closing down. Demand rose from housebuilders who were getting increasingly concerned that they wouldn’t be able to class dwellings as liveable without locking down a secure supply of toilets. The chief exec of Lixil, which makes bathroom and building equipment, said that some wholesalers were placing orders for 10x more product than they actually needed, which resulted in everyone else doing the same! Toto, Japan’s biggest toilet maker, also saw demand spike and, on a broader basis, global interest in Japan’s smart toilets (if you have yet to understand the joys of the incredible Japanese toilet, have a look at THIS. It’s a few years old, but gives you an idea 😱) has increased due to people seeking better standards of sanitation and hygiene. * SO WHAT? * Although this is interesting, it is likely that this will be a short-term phenomenon for the toilet makers as production in China is coming back and housebuilders now have a decent inventory. I thought this was worth highlighting because there aren’t a lot of “winners” out there!

Companies ramp up orders for kit to protect workers (Financial Times, Daniel Thomas, Nikou Asgari and Alice Hancock) looks at the huge demand for Personal Protective Equipment (PPE) kit that will rise even further as more companies plan to reopen whilst ensuring the safety of their workers. Bulk orders for PPE, plastic sheeting to divide office desks and act as shields for shop workers – and many other bits and pieces besides – are going up. It’s actually rising to such an extent that there are concerns that it could dent supply to the NHS and care homes. Companies like Gompels Healthcare, ICL Tech and Doncaster Plastics are all seeing a huge uptick in demand

from companies in various industries. * SO WHAT? * Again, it’s all a question of balance. Suppliers of PPE are going to have to get the balance right between supplying companies and supplying the NHS and care homes on the one hand and the companies doing the ordering are going to have to do their bit by not buying overspecced product for their needs on the other.

And in the losers’ corner, L Brands, Sycamore agree to scrap Victoria’s Secret deal (Wall Street Journal, Kimberly Chin) shows that the deal they had agreed pre-coronavirus has now been dropped (private equity firm Sycamore Partners had agreed to buy Victoria’s Secret from L Brands), Shake Shack pauses rapid growth (Wall Street Journal, Heather Haddon) shows that the burger chain has had to put the brakes on its growth in an effort to shore up its balance sheet and Rental-car industry gets crushed by coronavirus (Wall Street Journal, Nora Naughton) highlights yet another industry in a dire position thanks to the coronavirus. Avis Budget Group reported a hefty net loss for the first quarter, with revenues in April and May expected to be even worse, Hertz looks like it could go bankrupt and Enterprise Holdings has stopped hiring and made some staff cuts. * SO WHAT? * The car rental industry has been under threat for some time now with the rise of ride-hailing apps like Uber and Lyft, but they are now facing huge challenges due to the collapse of the airline industry (this sector accounts for two-thirds of its business – and lockdowns have meant this has gone to virtually zero) AND the falling value of their vehicle fleets that are subject to a weakening secondhand market.

I’ve been writing a lot recently about the travails of the meat processing industry and Tyson braces for months of coronavirus disruption (Wall Street Journal, Jacob Bunge) shows that one of the industry’s giants expects more business disruption over the coming months as it fights to keep its plants open. Rivals including Cargill, JBS USA and Smithfield Foods are all having similar problems as increasing numbers of staff call in sick. * SO WHAT? * Trump can do what he likes in terms of attempting to force the meat processors to stay open, but if there aren’t enough staff to keep them going there is ultimately going to be a shortage of meat on supermarket shelves. Bad news for meat-eaters but very good news for the plant-based alternatives if they can keep production going. As I have said before, manufacturers of the latter aren’t quite so labour intensive and it’s easier for employees in these places to maintain social distancing.

And finally, in other news…

Yesterday was “Star Wars” Day (“May the Fourth” be with you and all that 😂) and it seems like some local officials chose a fun way to enforce quarantine measures in Darth Vader’ enforces lockdown in Philippine village (Reuters, Neil Jerome Morales https://tinyurl.com/y8h74elp). Elsewhere, we see consequences of home-based reporting on TV shows in Dog interrupts weather report by breaking computer during ‘best forecast ever’ (The Mirror, Luke Matthews https://tinyurl.com/y7qea5zg). Cute dog!