Tuesday 27/09/22

  1. In UK MACRO NEWS, we take a look at sterling devastation and why markets hated the mini-budget so much
  2. In GLOBAL MACRO NEWS, the OECD predicts gloom, the Fed warns the UK, Germany’s having a ‘mare and Italy goes right
  3. In RETAILER NEWS, Aldi commits, Pendragon gets an offer and MusicMagpie plunges
  4. In INDIVIDUAL COMPANY NEWS, Apple goes to India and investors snap up Porsche
  5. AND FINALLY, I bring you a gathering of Nigels (not sure what the correct collective noun is, I’m afraid)…

1

UK MACRO NEWS

So the market reaction from the mini-budget was pretty fierce…

📢 Just a reminder – I’ll be doing the roundup of SEPTEMBER’s news on MONDAY, OCTOBER 3rd at 5pm. You need to register for this event to attend (don’t worry – it’s still FREE!) and you can do so HERE. For those of you who don’t know, this is an event where I go through the developments of the month’s events and news with input from Jake Schogger from the Commercial Law Academy. It’s not just a summary – I show you how the stories have evolved (which saves YOU a ton of time!) 👍

The market reaction to Friday’s mini-budget announcement was pretty fierce, to say the least! UK lenders pause new mortgages amid market turmoil (Financial Times, Emma Dunkley, Siddarth Venkataramakrishnan and George Hammond) shows that lenders including Halifax, Virgin Money and Skipton Building Society have suspended new home loans due to market volatility prompted by last week’s mini-budget announcement – and those who haven’t pulled out already are likely to do so today or in the coming days. Mortgages to rise by almost £10k a year if interest rates hit 6pc (Daily Telegraph, Tim Wallace and Tom Rees) shows that markets are pricing in an interest rate of 6% next year, which could increase mortgage payments on homeowners on floating rates by up to £800 per month.

Currency rout will drive prices up by 15pc, warns Deutsche Bank (Daily Telegraph, Laura Onita and Hannah Boland) cites analysts at Deutsche Bank who reckon that the dramatic collapse of the pound will mean shop prices will rise by 15% over the next two years. Items imported from overseas will obviously be most vulnerable and this comes at a difficult time where retailers and manufacturers are already facing rising energy bills and other costs. How significant is the sterling crisis? (Financial Times, Chris Giles and George Parker) takes a look at sterling devaluations of yesteryear and compares them what we are seeing now as the pound hit its lowest value against the dollar in history, just a whisker off parity (which is when £1 = $1). It then goes on to say that the weakening pound will result in higher inflation, which in turn will prompt higher interest rates, which means that the cost of debt will be higher – and that will dent household budgets and companies who would otherwise be thinking about borrowing money to invest. It suggests four potential responses to arrest the slide in sterling: firstly, the government could force the Bank of England to buy sterling using foreign currency reserves (but we don’t hold that much, so it would be of limited help); secondly, the government could do a U-turn on its fiscal policy changes (but Truss and Kwarteng have already committed); thirdly, the Bank of England could raise interest rates sooner rather than later to make holding money in the UK more attractive; fourthly, senior officials at the Bank of England could talk up the pound by saying that there

will be more interest rises on the cards and commit to taking immediate action in things start to go haywire – which could calm things down (which is pretty much what they have just done). UK stocks: sterling collapse has few silver linings (Financial Times, Lex) says that a weak currency just makes the rising inflation situation even worse than it already is. Although British companies that earn in dollars (like natural resource producers and exporters including Rolls-Royce, Smiths and Spirax Sarco, for instance) will do pretty well from all this, domestically focused companies with large debts will suffer badly. Pub operators like Marston’s and Mitchells & Butlers have already flagged the threat of inflation to their finances and we’ll just have to wait and see whether the government can front up with funds as they had to (with varying success) over the pandemic. UK business from airlines to brewers braced for higher costs as sterling falls (Financial Times) cited the retail, hospitality and aviation sectors as among the industries that will feel the effect of the falling pound most keenly but companies that sell to the US may actually do better because weak sterling means that their goods are “cheaper”. BAE Systems should benefit, but companies like Unilever and British American tobacco should also do OK from seeing the value of their US profits rise. Other companies with decent US presence include Burberry, WH Smith, Watches of Switzerland and JD Sports – and even the embattled Aston Martin might do well out of it because although it buys a lot of its parts in euros, it sells a lot of cars to the US.

Overall, though, Why markets hated the mini-budget so much and what next? (Daily Telegraph, Eir Nolsøe and Tom Rees) does a good job of explaining the reasons behind such an extreme market reaction to Friday’s announcements. Firstly, nobody believes that the Kwarteng-Truss plan will help the economy reach their 2.5% annual growth target. The thinking behind this is that the action of cutting taxes will pay for itself in the longer term as the economy grows and tax receipts rise – but many commentators and investors don’t believe this. Secondly, there’s not much detail about how the tax cuts will actually be paid for – something that is likely to be particularly problematic in an environment where interest rates are rising. If things get really bad, it’s possible that the UK’s credit rating will slide, which would make debt even more expensive. Thirdly, investors are sceptical about the timing of these measures as already double-digit inflation is hitting real incomes (which is why we are seeing so many strikes at the moment).

In the meantime, Households facing even bigger squeeze on living standards from slumping pound (Daily Telegraph, Eir Nolsøe) cites the opinions of the Resolution Foundation, which warns that the rise in inflation and weaker sterling will soon hit families. Import costs make up a third of household spending, so this is going to hurt.

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

GLOBAL MACRO NEWS

The OECD adds to the gloom party – as does the Fed – while Germany loses confidence and Italy lurches to the right…

Leading economies sliding into recession, OECD finds (The Guardian, Phillip Inman) cites the OECD’s latest report which has cut growth global economic growth forecasts and highlighted the damaging effects of the Ukraine war and energy crisis while Fed official warns UK tax cuts increase risk of global recession (Financial Times, Colby Smith) shows that a senior Federal Reserve official said that the Truss-Kwarteng plan “has really increased uncertainty and really caused people to question what the trajectory of the economy is going to be”. All pretty obvious stuff, but it just goes to show how much of a big deal this all is.

Over in Europe, Germany dragged into sharp recession (The Times, Mehreen Khan) cites the OECD report I referred to earlier as saying

that Germany is on track to see the worst economic contraction in the G20 apart from Russia and take the eurozone down with it, while Morale takes a hit from ‘fat minus’ on all fronts (The Times) highlights rock-bottom corporate confidence as evidenced in the latest Ifo business climate index, which proved to be way worse than expectations. The lack of confidence was particularly prevalent in the retail sector. It’s all looking rather ugly at the moment.

Meanwhile, Far-right wild card Giorgia Meloni taps into Italians’ wish for radical change (Financial Times, Amy Kazmin) shows that the Brothers of Italy leader is set to become Italy’s first female prime minister. Meloni is far-right, anti-globalisation and anti-establishment and appears to be the exact opposite of her predecessor, Mario Draghi. This is going to get interesting – particularly with how Italy interacts with Europe…

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

RETAILER NEWS

Aldi commits to low prices, Pendragon fields an offer and MusicMagpie has a profit warning…

Aldi’s UK profits fall but chain says shoppers are switching to it ‘in droves’ (The Guardian, Jasper Jolly) shows that although the Germany discounter unveiled a sharp fall in UK profits, it said that it would commit to low prices for its customers. Interestingly, CEO Giles Hurley, said that “Shoppers are shifting in their droves and coming to Aldi” as household budgets are squeezed and seek out bargains in their grocery shop. It reported a 20% increase in sales of its own-label baby brand and saw major increases in sales of its meat, poultry and beauty. * SO WHAT? * I’m going to stick my neck out here. Although Aldi was pretty cagey with this announcement, I think Aldi is going to absolutely smash it this Christmas. People will continue to switch from the incumbents IMO and seek out the joys of their hampers (which look like the ones you get from Fortnum & Mason and always seem to sell out), their smell-a-like fragrances and their stollen – as well as all the other stuff.

Then in Pendragon receives £400m takeover offer (Financial Times, Peter Campbell) we see that the UK car dealership (which

owns brands including Stratstrone and Evans Halshaw) has received a takeover offer from its biggest shareholder, Hedin Mobility. The news sent Pendragon’s share price up by about 20%. * SO WHAT? * Interesting timing, given what’s going on in the economy at the moment! Still, it would seem that the sharp upward movement in the share price suggests that investors are speculating about the possibility of some kind of potential counter-offer (which they always hope will turn into a bidding war!).

MusicMagpie has wings clipped after profit warning (The Times, Emma Powell) highlights the horrendous share price performance of the company that sells refurbished tech gadgets and used CDs and DVDs. It has plunged by 95% since it listed on London’s AIM market in April last year and made things worse by announcing that profits this year would fall short of expectations. It was particularly shocking to hear the company saying that it did not expect to do well in the October/November “Black Friday period”. Ouch. Mind you, it’s not the only company to have seen a decimated share price since flotation – just look at Made.com (-98% since its flotation in June 2021), Virgin Wines (-78% since its IPO in March 2021) and Deliveroo (-71% since its float in March 2021).

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

INDIVIDUAL COMPANY NEWS

Apple expands in India and Porsche is creating a buzz…

In a quick scoot around other interesting stories today, Apple expands iPhone production in India in shift away from China (Financial Times, John Reed) shows that the tech giant is making real moves to diversify its supply chains outside China as it announced that the iPhone 14 is being made in India. * SO WHAT? * It still makes most of its handsets in China but has been making efforts to shift some production out of the country as geopolitical tensions between the US and China continue to escalate. Production has also been affected by China’s ultra-strict Covid policies as well. The phone will be assembled by Foxconn, Pegatron and Wistron. This is a real win for PM Modi, who has been plugging

his campaign to increase manufacturing in India via his “Make in India” campaign. I wonder whether this will be the start of big sales of the iPhone in India as the market is currently dominated by Chinese and South Korean brands.

Then in Investors rush to snap up shares ahead of Porsche IPO (Financial Times, Alexandra White and Peter Campbell) we see that demand is looking pretty hot for tomorrow’s IPO when VW sells a 12.5% stake in the sports car maker. At the moment, it looks like it’ll price at the top of its €76.50 – €82.50 range. If it does that, this would value the group at €75.2bn and make it Germany’s second biggest IPO ever since Deutsche Telekom’s listing in 1996! It certainly looks hot, but given the state of the global economy, you do wonder how long the feelgood is going to last!

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…

I had a feeling of déjà-vu when I saw this (maybe I have published this before a few years ago) but the latest state of affairs for Nigels was chronicled in Gathering of 372 Nigels eases fears of mass ‘Nige’ extinction (The Mirror, Kirsten Robertson). This event was prompted by the official extinction of the name “Nigel” and desire for Nigels around the world to unite. As one attendee put it, “It was a great feeling of all of us getting together and celebrating our Nigel-ness” 👍.

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Some of today’s market, commodity & currency moves (as at 0634hrs 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 **
7,021 (+0.03%)29,260.81 (-1.11%)3,655.04 (-1.03%)11,802.92 (-0.6%)12,228 (-0.46%)5,769 (-0.24%)26,573 (+0.54%)3,094 (+1.40%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$77.509$84.839$1,632.041.078050.96414144.5211.1181420,040

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