Tuesday 10/05/22

1. In MARKETS, MACRO & OIL NEWS, global markets weaken, China has issues, Russia is suffering, crypto market value drops and we see how oil companies made their money
2. In M&A AND IPO NEWS, Philip Morris pursues Swedish Match, Morrisons buys McColl’s and Goldman Sachs swerves SPACs
3. In CONSUMER-RELATED NEWS, European wages rise, higher energy bills are a short and long-term problem, UK consumer spending falls but US consumers keep buying expensive meat
4. In MISCELLANEOUS NEWS, Ford sells a bit of its Rivian stake while UK electric car sales more than double, BAE Systems and Rolls-Royce get a nuke contract and defence companies experience supply problems
5. AND FINALLY, I bring you something you didn’t know about post boxes…

So markets tumble, China and Russia face challenges, crypto shrinks and we see how the oil companies made money…

Global stock markets drop amid fears of inflation and China slowdown (The Guardian, Graeme Wearden) shows that stock markets fell sharply yesterday thanks to ongoing inflation fears and a slowdown in China exports, as per Chinese exports hit by lockdowns and drop in demand from West (The Times, David Byers), which highlights the fact that China’s exports grew at their slowest pace in almost two years – 3.9% in April versus 14.7% in March. This is mainly due to the effect the lockdowns are having on the economy. Chinese premier predicts ‘grim’ outlook for country’s job market (Daily Telegraph, Louis Ashworth) shows that the outlook isn’t that great either as Li Keqiang warned that job losses were likely as the latest figures from China’s National Bureau of Statistics showed unemployment levels hitting 5.8%, the highest level since May 2020.

Things ain’t great in Russia either as Russia faces economic collapse (Daily Telegraph, Louis Ashworth and James Warrington) says that the Russian finance ministry is forecasting a 12% drop in GDP this year in its biggest contraction since 1994 in the transition to capitalism. This would effectively cancel out about ten years’ worth of economic growth. * SO WHAT? * At the end of the day, the war is ongoing and no-one can ever predict with any accuracy the scale of economic losses involved. It WILL be damaged, though, and if Putin stays in after the end of the war, the economic impact is likely to continue as sanctions will still be in place. The only way I can see this changing is if Putin is not in power. Yes, he might be able to negotiate an opening with the West in return for stopping the war, but I think that if that were to happen, businesses would be very wary about going back because they would be worried that it could happen all over again.

Meanwhile, Crypto market value drops by $1.6tn since November high (Financial Times, Scott Chipolina) shows that cryptocurrencies are in a bit of a rut at the moment as investors have taken money out of riskier/speculative investments against a tricky economic backdrop. Bitcoin, for instance, has lost over half of its value since November last year and is now trading at its lowest level since July 2021 but others have fallen even further. Crypto-exposed companies (e.g. MicroStrategy and Coinbase) and bitcoin miners (e.g. Bitfarms and Marathon Digital Holdings) have also fallen in value. * SO WHAT? * It looks increasingly like the performance of crypto and the US stock market are very closely linked – with the correlation of Bitcoin and the NASDAQ being particularly notable. At the end of the day, investing in crypto comes with risks – but then again, the rewards can be huge (just ask anyone who bought Bitcoin at under $1,000, for instance!).

Then in Trade secrets: oil majors keep quiet on a key profit driver (Financial Times, Tom Wilson and Neil Hume) we see that one of the main reasons why oil companies – including the likes of BP, Shell and TotalEnergies – have had such stellar results recently is that their trading teams have made huge profits! * SO WHAT? * The thing is that it’s difficult to separate out these elements because of the way the companies report – and it is worth noting that US oil majors don’t have the same capability. Given that more price volatility is expected thanks to the unpredictable geopolitical environment at the moment, the oil traders are likely to make even more money going forward because big price movements can be their friend. Windfall tax, anyone??

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!

Phil Morris like Swan Vestas, Morrisons wants to gobble up McColl’s and Goldman Sachs shuns SPACs…

Philip Morris International nears $16bn deal for Swedish Match (Financial Times, Arash Massoudi, Patricia Nilsson and James Fontanella-Khan) shows that the cigarette giant is close to buying Swedish Match for around $16bn including debt. If this deal goes ahead, it would be PMI’s biggest move since it tried and failed to merge with Altria in 2019. Swedish Match is a market leader in snus (oral nicotine pouches), a product that has boomed in popularity over the last year in the US and Scandinavia. It owns a number of brands covering  moist snuff, chewing tobacco, cigars, matches (they own Swan, for instance!) and lighters, among other things. It does look like the deal will go ahead…

Following on from what I said yesterday, Morrisons wins race to buy McColl’s ahead of Asda owners (The Guardian, Joanna Partridge) shows that Morrisons has beaten rivals to buy McColl’s after the convenience store chain fell into administration. All of McColl’s 16,000 staff will be transferred to Morrisons, all of its shops will continue trading and Morrisons has also pledged to rescue its two pension schemes. Morrisons already supplied a range of products to McColl’s under the Safeway brand. * SO WHAT? * This sounds like a good outcome for McColl’s

staff, although you do wonder what plans Morrisons has for it. I think that this is a lot to swallow for a supermarket at this stage in the economic cycle, but we’ll have to see what the plans are.

I thought I’d mention Goldman Sachs pauses work on new SPACs after SEC takes tougher stance (Financial Times, Ortenca Aliaj, Nikou Asgari and Joshua Franklin) as the investment bank has stopped new SPAC offerings for the moment – notable considering that it was last year ranked as the second-biggest underwriter for SPACs, helping sponsors raise $16bn. The SEC suggested reforms back in March to improve transparency and rules that would be more in line with traditional IPOs. The key sickener here for investment banks is that the new rules would increase their liability for misstatements related to the merger and as underwriters. * SO WHAT? * When you consider that most banks take about 5% of a SPAC’s IPO proceeds in fees, you can see why they have been so popular! Still, given that some of the companies brought to market via the SPAC route have faced embarrassing difficulties and accusations sending their share prices through the floor it’s not surprising that they’ve attracted more scrutiny . You can see why the banks are getting rather reticent about getting their hands dirty! Another potential nail in the coffin for SPACs…

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!

Although wages are rising in Europe, consumers continue to face hurdles while Tyson Foods sizzles…

In a quick look at some consumer trends, Eurozone’s long-stagnating wages start to rise as cost of living soars (Financial Times, Martin Arnold) shows that Europe’s unions are managing to exert pressure successfully on companies, as Germany’s biggest union, IG Metall, is on the verge of negotiating an 8.2% wage increase for the country’s 85,000 steelworkers in the next few weeks. If other unions around Europe take their lead, this could be bad news for inflation and pile even more pressure on the ECB to raise interest rates.

Meanwhile, Energy bills are an immediate crisis – and a long-term problem (Financial Times, Helen Thomas) provides an interesting discussion on one of the biggest issues on UK consumers’ minds at the moment – rising utility bills. The main conclusion here, though, is that although we have a crisis in the making over the next few months, the change to renewables and weaning-off of Russian output will mean that the bills are likely to stay high for some time to come.

Funnily enough, Rising household bills prompt shoppers to rein in spending (Daily Telegraph, Tim Wallace) provides yet more evidence that consumers are trying to tighten their spending. The latest British Retail Consortium data shows that retail sales last month were down by 0.3% versus April 2021. Figures from Barclaycard show that families are trying to cut spending in supermarkets and on fuel – and on big ticket purchases. It’s hardly surprising, but the evidence just keeps on coming…

Meanwhile, in the US, Tyson Foods profits soar as meat prices climb (Wall Street Journal, Patrick Thomas) shows that the company has benefited not only from strong demand for meat – but also its ability to successfully pass on higher costs to consumers. It is the biggest US meat processor by sales and has upped its prices for beef, chicken and pork a few times now. Mind you, Tyson Foods: meat producer will struggle to keep its sizzle (Financial Times, Lex) points out that its success at passing on higher costs could attract the attention of regulators as there have been accusations that there isn’t enough competition in the meat processing sector.

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!

There were some interesting developments in the automotive and defence sectors…

In a quick scoot around other interesting stories today, Ford sells about 8% of its stake in electric vehicle startup Rivian (Wall Street Journal, Mike Colias) shows that Ford sold down some of its 11.4% stake in Rivian, sending the share price down 21% as investors were made aware of the seller. It sold around 8 million of its 102 million shares between late Sunday and Monday morning via Goldman Sachs and investors are no doubt particularly worried about further downside as Ford said it no longer planned to jointly develop an EV with Rivian. * SO WHAT? * The lockup period post-IPO expired on Sunday, so usually sellers tend to emerge from the woodwork. It’s interesting to see that they are selling despite the fact that Rivian’s share price has already fallen by 78% this year! It remains to be seen whether there’s much sustainable upside for Rivian for the short-to-mid term given that it recently stated it had production problems due to supply chain issues.

Staying on the subject of EVs, UK sales of secondhand electric cars more than double in a year (The Guardian, Jasper Jolly) cites the latest figures from the Society for Motor Manufacturers and Traders which show that there’s

a bit of a frenzy going on as sales of used EVs shoot up by 120%! Presumably, one of the main reasons for this rise is that there isn’t much of a supply but as more EVs are bought over time and early-adopters sell to get their next car, the supply should increase. For now, though, prices are pretty buoyant!

Then in BAE systems and Rolls-Royce win £2bn UK nuclear deterrent contracts (Financial Times, Sylvia Pfeifer) we see that the two companies have won defence contracts as part of a wider £31bn programme to renew our nuclear deterrent. However, Defence companies face supply snags as demand for US weapons rises (Financial Times, Steff Chávez) shows that other defence companies like Northrup Grumman, are facing supply chain problems that means it’ll be more difficult to keep up with demand. * SO WHAT? * Russia’s invasion of Ukraine has prompted a number of countries to dramatically increase their defence budgets, but defence companies seem to be facing the same supply chain disruptions as everyone else! Lockhead Martin, Raytheon Technologies, Boeing and General Dynamics are among those who  will benefit from increased defence spending, but they will be frustrated by supply issues, labour constraints and rising inflation that will impact input costs.

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…

After reading this, you’ll never look at a post-box in the same way again: People’s ‘minds are boggled’ after learning what bottom of postboxes actually look like (The Mirror, Courtney Pochin). Well I never.