Tuesday 24/05/22

  1. In MACRO & ENERGY NEWS, Biden commits to Taiwan, Italy’s economy suffers, Sunak bows to windfall tax pressure, the US faces blackouts and Siemens Energy goes for Gamesa
  2. In TECH NEWS, Broadcom’s in talks to buy VMware in $50bn deal, Zoom puts in a decent performance and Snap has a profit warning
  3. In FINANCIALS NEWS, the SEC fines BNY Mellon, private equity faces more scrutiny and Klarna cuts 10% of its employees
  4. In MISCELLANEOUS NEWS, EV battery prices rise, B&Q’s owner sees more upside, Starbucks exits Russia and Airbnb exits China
  5. AND FINALLY, I bring you an amazing illusion…

1

MACRO & ENERGY NEWS

So Biden commits to Taiwan, Italy takes a blow, Sunak yields to pressure, US blackouts loom and Siemens Energy/Gamesa moves forward…

Biden says his Taiwan policy hasn’t changed (Wall Street Journal, Andrew Restuccia) highlights Biden’s latest gaffe as he said yesterday that the US would respond militarily if China invaded Taiwan, only to be reined-in by staff, who made the less forthright commitment to “provide Taiwan with the military means to defend itself”. Ah Biden… * SO WHAT? * China will not have liked this statement one bit and it may well be that their displeasure resulted in that official walk-back of Biden’s unequivocal statement. Taiwan, on the other hand, would probably have welcomed it! Still, actually sending American troops in the event of an invasion would go further than the current stipulations of the Taiwan Relations Act, passed in 1979. Biden just seems to be lurching from gaffe to gaffe. He really needs to sort himself out…

Elsewhere, Italy’s economic prospects sour as inflation bites (Financial Times, Amy Kazmin) shows that the momentum that built up over 2021 and since, under PM Mario Draghi’s leadership, is faltering. This is mainly because it relies so much on Russia for its energy – it’s up there with Germany on this – and although it’s signed a deal with Algeria to provide gas, it will take years to have a meaningful effect. * SO WHAT? * Although Italy is in line to get €191bn of the EU’s €750bn Covid recovery package and Italians have saved a lot under lockdown, the money won’t last forever. Draghi recently imposed a 25% windfall tax on energy companies’ excess profits and provided people with energy subsidies and a one-time €200 cash payment to soften the blow, but things are still proving to be difficult.

Back home, Sunak orders plan for windfall tax on electricity generators (Financial Times, George Parker, Jim Pickard and Nathalie Thomas) shows that Sunak has now tasked officials to draft plans for a possible windfall tax on electricity generators (which includes windfarm operators) as well as North Sea oil and gas producers. It is possible that the scheme could go quite a bit further than the windfall tax proposed by Labour, which would only encompass North Sea oil and gas producers. Still, North Sea’s biggest oil and gas producer warns against UK windfall tax (Financial Times, Nathalie Thomas) shows

that Harbour Energy said that such a tax could be “detrimental” to energy security as it would lead to the industry approving fewer projects at a time when ministers are looking at ways to wean ourselves off Russian energy. BP, Shell, Eni, TotalEnergies and Neo Energy are among the producers operating in the North Sea. * SO WHAT? * Sunak’s plan could be very interesting, but of course the devil is in the detail. It’s particularly interesting that he may be including windfarm operators in all of this, but I guess we’ll just have to wait for the detail. As for the oil and gas companies, of course they are going to be objecting to this – it’s their job!

Meanwhile, ‘Megadrought’ threatens water and power supplies to millions in US (Financial Times, Aime Williams) highlights energy problems in the US as a huge drought in the south west of the US has led to water levels in the country’s two biggest reservoirs to reaching record lows, putting a strain not only on water supply itself, but also the hydroelectricity it generates. US government climate scientists are saying that over half of the country is now experiencing drought conditions, with a scientist at the US government’s National Oceanic and Atmospheric Administration describing it as “by far the worst drought in our records”.

Then in Siemens Energy warns on wind costs ahead of Gamesa acquisition (Financial Times, Joe Miller) we see that a rise in raw material costs could potentially mean that wind energy may lose its crown of being a cheaper alternative to fossil fuel-generated power, according to the head of Siemens Energy. Wind prices have been rising since 2019 thanks to supply chain disruptions and higher raw material costs hit the sector. Siemens Energy announced over the weekend that it would be going ahead with the expected acquisition of the 33% of Siemens Gamesa that it doesn’t already own, something that Siemens Energy/Gamesa: minority buyout promises a turn for the better (Financial Times, Lex) suggests is a good thing, as it will give Siemens Energy more control over its destiny in the mid-to-long term. * SO WHAT? * The wind industry is having a tricky time at the moment directly because of the price increases of raw materials like steel, copper and rare earths needed to make turbines and the likes of Vestas and Nordex are also suffering along with Siemens Gamesa. Given the current difficulties, you’d think that there is scope for further industry consolidation…

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!

2

TECH NEWS

Broadcom makes moves, Zoom puts in a solid performance but Snap doesn’t…

Chipmaker Broadcom in talks to buy VMware for up to $50bn (Financial Times, James Fontanella-Khan and Antoine Gara) shows that US chipmaker Broadcom is currently in acquisition talks with VMware which could transform it into a diversified tech company with the scope of its business covering everything from chip manufacture to cloud computing services. Dell founder set for $20bn payday if Broadcom buys cloud firm (Daily Telegraph, James Titcomb) shows that there will be at least one major fan of the deal as Michael Dell could get a major $20bn windfall if it goes ahead! Dell bought a majority stake in VMware in 2016 when it acquired storage company EMC, which in turn owned 81% of it. Michael Dell currently owns around a 47% stake in Dell and 40% stake in VMware. Broadcom/VMware: mature software starts are cash cows for the downturn (Financial Times, Lex) reckons this would be an impressive combo that stands to do well in a downturn as investors will like the enlarged company’s high margins and customers’ increasing focus on efficiency. * SO WHAT? * It seems that the recent investor rotation out of tech has thrown up investment opportunities like this, so it will be interesting to see whether there will be more consolidation like this, especially if they are on this scale!

Then in Zoom doing nicely despite pandemic coming to an end (Daily Telegraph) we see that Zoom yesterday raised its earnings forecast for the year, putting to bed any

lingering doubts as to how flaky it would be as many emerge from lockdown. Its share price spiked by 15% on the news although they have actually fallen by 51% this year as part of the tech sector I was referring to above. * SO WHAT? * This is certainly good news, but the company is surely not going to return to the growth “glory days” of lockdown – plus it still has the mighty Microsoft breathing down its neck with the FREE Teams.

On the other hand, Snap issues profit warning on economic conditions including inflation (Wall Street Journal, Meghan Bobrowsky) shows that Snap made a dramatic announcement yesterday as the platform struggles to adjust to disruption in the digital ad market. The company blamed rising inflation, changes to Apple’s privacy policy and the Ukraine war for its profit warning and the decision to cut down on hiring and spending. The revised figures for revenue and adjusted earnings would come in below market expectations. The company’s share price tanked by a whopping 30% in after-hours trading. It has fallen by an eye-watering 80% since its recent highpoint in September last year! * SO WHAT? * It sounds to me like Snap has run out of ideas for now and needs to come up with something quick (that Meta Platforms will no doubt copy 🤣) to get growth back on track because advertising had been a major driver behind its performance. I wonder whether it will be doing more of what all the other platforms are doing at the moment – implementing more ways for creators to monetise in order to attract better content.

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!

3

FINANCIALS NEWS

The SEC slaps BNY Mellon, PE faces more scrutiny and Klarna cuts…

SEC fines BNY Mellon over ESG in first case of its kind (Financial Times, Patrick Temple-West and Stefania Palma) shows that the US Securities and Exchange Commission has slapped the company’s investment advisor division with a $1.5m fine for misstating and omitting information about ESG considerations for mutual funds that it was responsible for. This is the first time the SEC has imposed a fine on an investment adviser re ESG statements and comes just a couple of days before it is due to announce new rules on how financial firms should apply ESG or other “green” labels to funds. * SO WHAT? * Given the rising demand for more environmentally and socially responsible funds, it isn’t really surprising to hear that there is, at last, a bit of a crackdown on “greenwashing”. The SEC said that between January 2019 and March 2021, 67 out of 185 investments made by a mutual fund advised by BNY Mellon Investment Adviser didn’t have an ESG quality review score. OK, so a $1.5m fine is a mere pimple on the backside of a huge fund, but it is the principle that counts here. It’ll be interesting to see what the new rules are…

Following on from what I was saying last week, Private equity moves into the antitrust spotlight (Financial Times, James Fontanella-Khan) shows that the US Department of

Justice’s antitrust unit head, Jonathan Kanter, wants to crackdown on acquisitions in a sector that are designed to essentially corner a particular sector and give the PE firm more pricing power. Last week’s article was more focused on PE’s as conglomerates whereas this article was more about the increasing incidence of firms “rolling up” or “hollowing out” whole industries and then cashing out. Last year alone, PE firms did 14,730 deals worth $1.2tn, generating $23.4bn in fees, significantly more than their investments banker counterparts. * SO WHAT? * It looks like there are going to be tough times ahead for PEs and the DoJ ahead, but this certainly needs looking at! PE firms aren’t going to take this lying down, though – and they have VERY deep pockets!

Then in Klarna lays off 10% of staff as consumer confidence tumbles (The Times, David Byers) we see that the chief exec of Klarna announced to staff that 10% of them will lose their jobs as consumer confidence plummets thanks to rising inflation, the ongoing economic effects of the war in Ukraine and the increasing scrutiny of the BNPL model. Fintech/Klarna: their stars wane amid rising credit costs (Financial Times, Lex) reckons there will be more pain to come at fintechs as hard economic times expose the weaknesses of their business models.

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!

4

MISCELLANEOUS NEWS

EV battery prices rise, Kingfisher hopes to continue to surf the DIY wave while Starbucks and Airbnb shut down operations in Russia and China respectively…

In a quick scoot around other interesting stories today, Electric car battery prices on the rise (Daily Telegraph, Howard Mustoe) cites figures from the International Energy Agency which say that the cost of EV batteries will rise by 15% if metal prices persist at current levels, making driver transition to electric more difficult. * SO WHAT? * Given that the batteries are the highest portion of production costs, this is significant. Also I’d add that most assumptions of EV sales growth depend on the assumption that battery prices will fall over time – the opposite of which is happening currently.

B&Q owner looks past sales slide to busy market (The Times, Ashley Armstrong) shows that although sales at Kingfisher, the owner of B&Q and Screwfix, have fallen over the last quarter, it is sticking with its full year forecasts. Although comparatives are unflattering given stellar growth

this time last year, the company was keen to point out that sales are still ahead of what they were pre-pandemic. Kingfisher/DIY: downturn would be tough for pandemic winner (Financial Times, Lex) observes that both DIY punters and professional tradespeople are going to be hit by pressure on real incomes. They will also have more leisure choices than they had under lockdown and this sector is not immune to recession. Still, the company has increased its market share and has bolstered its finances in the last few  years. It’s a tough one to call as there are equal arguments either way as to which way it could go!

Meanwhile, Starbucks to exit from Russia (Wall Street Journal, Heather Haddon) highlights the company’s decision to shut down operations in Russia after 15 years in the country while Airbnb to quit China business as harsh lockdowns, competition weigh on demand (Wall Street Journal, Preetika Rana) highlights Airbnb’s decision to cut the cord in China although it will still offer Chinese customers the chance to use its services outside China. It is a minnow in China, so although this isn’t ideal, I don’t think it’s going to be a disaster.

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!

5

...AND FINALLY...

…in other news…

There are optical illusions – and then there’s this: Confusing optical illusion of a man’s jumper changing colour leaves people baffled (The Mirror, Julia Banim). Try to follow the guy with the green hoodie. I had to watch it a load of times!!! Very very clever indeed 👏👏👏

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Some of today’s market, commodity & currency moves (as at 0753hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
7,513 (1.67%)31,880.24 (+1.98%)3,973.75 (+1.86%)11,535.27 (+1.59%)14,175 (+1.38%)6,359 (+1.17%)26,767 (-0.87%)3,071 (-2.41%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$108.88$111.95$1,852.481.258131.06805127.5831.1779529,294.4

(markets with an * are at yesterday’s close, ** are at today’s close)