Tuesday 06/11/18

1. In TARIFFS AND SANCTIONS NEWS, US farmers express disappointment, China’s neighbours look to benefit and Iran expresses defiance in the face of major US sanctions
2. In UK NEWS, the services sector, retail sales and car sales all slow down
3. In INDIVIDUAL COMPANY NEWS, SoftBank backs the Saudis and Lidl puts the pressure on others by raising wages
4. In OTHER NEWS, I bring you Mo Salah/Leo Sayer. For more details, read on…

So US farmers are p!ssed off, China’s neighbours are quietly hopeful and Iran remains defiant in the face of sanctions…

I thought that there were some interesting points of view in today’s papers on the effects of the current US/China/rest of the world trade war and Farmers round on Donald Trump as demand for soybeans dries up (Financial Times, Demetri Sevastopulo) paints a picture of disgruntled farmers who voted Trump into office because they believed he would protect them, not torpedo their biggest buyers of soybeans. China imposed retaliatory tariffs on US soybean imports after Trump started his trade war and so demand for their product dried up overnight. Their losses may be mitigated in the short term because they have crop insurance and forward contracts to sell soyabeans plus the government created a $12bn buffer to reimburse them. However, these protections will fade away the longer the trade war drags on – and China may, in the meantime, find other long-term markets.

China’s neighbours could win from US tariff tussle (Wall Street Journal, Mike Bird) takes a look at which countries are actually benefitting from the trade war as US importers look to source elsewhere in the Asian region. Bank of America Merrill Lynch economists point to Taiwan, Vietnam and South Korea as countries with the most to gain as they have similar export profiles to China. Countries in the region could also benefit from investment being diverted away from China – a survey conducted by the American Chamber of Commerce in South China and published last week indicated that about 70% of companies are considering relocating some or all of their manufacturing out of China, with Southeast Asia being the preferred alternative destination. In terms of which sectors might benefit, tech companies in Vietnam and Malaysia could be winners while Thailand could benefit from its expertise in auto parts production. Other imports such as shoes, toys and textiles could all be sourced from Vietnam, India, Bangladesh and Indonesia whilst electrical

equipment and machinery can also be sourced in Mexico, Turkey and South Korea. * SO WHAT? * I have found in the past that the often skewed nature of supply chains only becomes apparent when something major – like a natural disaster or, in this case, a major trade war – causes a breakdown. There is then a realisation by industries and individual companies that they have been overly reliant on only a narrow range of suppliers, which then forces them to look at other options. We are now in such a situation and this may prove to be a real long term boon to countries in the region. Guessing which countries, industries and companies will benefit is always a bit of a game, but it is an exercise worth doing as the upside for some of the affected parties can be enormous and long-lasting.

Trump warns world against breaking Iran oil embargo (Wall Street Journal, Ambrose Evans-Pritchard) underlines the serious intentions of Trump’s reimposition of sanctions against Iran, with US Secretary of State Mike Pompeo warning that “doing business in Iran in defiance of our sanctions will ultimately be a much more painful business decision than pulling out of Iran”, with violators facing “swift and severe” penalties. The intention is to force Iranian exports to zero and the US justifies the action by alleging Iran’s links to terrorists, its supply of missiles to the Houthi rebels in Yemen, the use of Shia militia to destabilise Iraq and its support for Assad in Syria. Funnily enough, this hasn’t gone down well in Iran as per Iran vows to ‘break’ sanctions as US reimposes ban on oil (Wall Street Journal, Asa Fitch, Ian Talley and Courtney McBride). * SO WHAT? * This has serious implications for EVERYONE because it means that a chunky amount of oil supply is just going to disappear at a time where supply has already been dented for one reason or another. Although oil demand is slowing as global economic growth cools, this hole in supply will be difficult to replace even if the Saudis say that they can plug it. David Fyfe, former chief oil analyst for the International Energy Agency warned that “…if crude prices go durably above $100 it will push the world into recession, given all the issues in emerging markets right now”. Basically, no-one can afford to p!ss off the Americans, so Iran is going to have a very tough time. However, if it turns out that Trump has overcooked it, we are ALL going to have a very tough time.

In UK news, the services sector, UK retail sales and new car sales all take a dive…

In incredibly uplifting news (not!) on the UK economy today, Services sector close to stalling amid concerns over Brexit crash (The Guardian, Richard Partington) cites data from the latest report published by IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) which shows that business activity for the last month has experienced a marked slowdown in the last quarter of 2018 which would imply that we’re getting a dose of reality after what proved to be a decent summer. * SO WHAT? * The UK services sector – which includes hotels, restaurants, transport and finance – accounts for 80% of our GDP and expanded at its slowest pace since March. CIPS group director Duncan Brock observed that “Many of the respondents attributed this poor performance and the biggest softening in new order growth since July 2016 to continuing ambiguity around the Brexit negotiations”.

Then there was even more unbridled joy for the UK

economy in Sluggish sales as shoppers play it cool (The Times, Deirdre Hipwell) which cites figures from the British Retail Consortium (BRC) and accountant KPMG which show that total UK retail sales actually rose this month, taking us above the three-month average but falling short of the 12-month average. Helen Dickinson, chief exec of the BRC, warned that “Brighter weather and the anticipation of better deals in the Black Friday November sales have dampened demand for discretionary purchases”. * SO WHAT? * Retailers are now in the run-up to the crucial run-up to Christmas where they make the majority of their annual profits. They’ve got everything to play for, but the signs aren’t looking particularly encouraging at the moment.

New car sales down despite electric surge (The Times, Robert Lea) looks at the latest figures from the Society of Motor Manufacturers and Traders which show that new car sales are still falling overall despite a rise in the purchase of electric and plug-in hybrid vehicles, which now account for almost 7% of all sales. The main reason for the overall fall is the continued tail off in demand for diesels. In terms of marques, Ford remains #1 (accounting for 10% of the sales of new cars), VW is #2, Vauxhall is at #3 but Mercedes-Bend and BMW are snapping at the latter’s heels.

SoftBank reiterates its support for the Saudis and Lidl ups staff wages…

In SoftBank reaffirms investment ties with Saudi Arabia (Financial Times, Kana Inagaki) we see that SoftBank reaffirmed its loyalty to Saudi Arabia as the company’s quarterly profit shot up over fivefold due to massive returns from its Saudi-backed $100bn Vision Fund. SoftBank’s chief exec Masayoshi Son condemned the Khashoggi killing but confirmed that the Vision Fund would continue to manage the money that had already been accepted (funny that, eh?), although he did not commit to accepting more. Shares in SoftBank itself have fallen by 22% since

the whole Khashoggi episode came to light. * SO WHAT? * Doubt surrounding a “Vision Fund 2” comes at a time when SoftBank’s traditional “cash-cow” Japanese telecoms business is suffering a slump. Son said he would cut the company’s headcount by 40% (!) to remain competitive but really this is a sideshow compared to what’s going on with Saudi Arabia. It will be nigh on impossible IMHO for SoftBank to sever ties with the kingdom given that the Saudis have committed $45bn to the flagship fund as part of its overall strategy to wean itself off reliance on oil revenues.

Lidl piles pressure on rivals with boost to hourly wage (Daily Telegraph, Sophie Christie) shows that the discounter is turning the screws on its rivals by boosting wages for its staff. The new rates will come in to force from March 1st next year and are in line with the new voluntary Real Living Wage rates I talked about in yesterday’s Watson’s Daily.

And finally, in other news…

I thought I’d bring you an interesting objet d’art today in Mohammed Salah statue: Football fans ridicule bizarre depiction of Liverpool star (Sky.com, Ajay Nair https://tinyurl.com/y93xf2o6). OMG. It would be interesting to know what the subject himself thinks of it!