Tuesday 29/01/19

  1. In MACROECONOMIC NEWS, US/China talks are set to continue, South Korea trade collapses, Italy slides into recession and German business confidence takes a kicking (so no drama there then…)
  2. In TECH NEWS, Apple looks at new areas and NVidia feels the pain of China’s slowdown
  3. In INDIVIDUAL COMPANY NEWS, we see Saudi Arabia slashing its exposure to Tesla and various possibilities for M&S and Ocado
  4. In OTHER NEWS, I bring you a Ferrero Rocher wrapper sculptor. Yep – that’s a thing. For more details, read on…



So more US/China talks are due, South Korea’s exports collapse, Italy heads into recession and Germany business confidence tumbles…

Big divides remain as US-China trade talks resume (Wall Street Journal, Bob Davis and Lingling Wei) heralds the resumption of Cabinet-level trade negotiations between the US and China tomorrow. There’s still a lot to be done before anyone gets too excited and US authorities unveil sweeping set of charges against China’s Huawei (Wall Street Journal, Kate O’Keeffe, Aruna Viswanatha and Dustin Volz) potentially throws a massive spanner in the works as the Trump administration has now levelled a comprehensive set of criminal charges against China’s Huawei Technologies alleging that the company violated US sanctions on Iran and stole trade secrets from a US business partner. * SO WHAT? * The timing of these charges isn’t going to make the negotiators’ jobs any easier and will effectively hand China an easy excuse to exit talks in a huff. However, I guess that getting this all out in the open now will be a test of how serious China really is about getting these talks done. We’ll see soon enough…

South Korea’s trade collapse may signal China contagion (Daily Telegraph, Tom Rees) suggests that China’s economic slowdown is now spreading to its neighbours as prelimenary data for January shows that South Korea’s exports contracted by an eye-watering 15% year-on-year while imports also fell by 9.5%. Although official figures say that Chinese GDP growth was 6.6% in 2018 – the lowest level for almost 30 years – many think that the real situation could be worse as the Chinese government has a reputation for “massaging” figures. * SO WHAT? * The US and China are South Korea’s biggest trading partners and so the whole tariff thing between them is really hitting South Korea hard. The fact that the Baltic Dry index – which measures shipping costs for commodities and is therefore seen as a bellwether on global trade – fell by 47% in five months to its lowest level since the summer of 2017 would also imply that the effects from the ongoing spat are spreading. Observers will be monitoring further economic indicators to judge whether this is a blip rather than a trend.

Meanwhile, in Europe, Italy entering ‘self-defeating loop’ as it slides into recession (Daily Telegraph, A. Evans-Pritchard) highlights the latest figures on corporate lending which fell by 5.5% in December, which could in turn lead to a debt crisis. Italian banks are having to curtail their credit activities in the face of the European Central Bank’s ultra-strict capital requirements as the whole country faces a major slowdown. Economic output is 4% below its previous peak, debt has shot up – and now equates to 132% of GDP – whilst core inflation bumps along at a very anaemic 0.5%. A big slug of cheap ECB money would be a welcome boon to the country but Mario Draghi, the ECB’s president, effectively shut that door when he said last week that the credit problems were mainly Italian in nature and that the ECB would not do anything about “country-specific” matters. * SO WHAT? * This could get very bad for Italy as it could fall into its third recession in ten years. And if it goes this way, it will probably drag others down with it. It seems to me that Draghi is just looking to bury his head in the sand for the rest of his term in office (which runs towards the end of this year) and is hoping that it will all just go away.

German export confidence falls sharply (The Times, Gurpreet Narwan) shows that things aren’t going great for Europe’s largest economy either as confidence among German exporters has taken a big hit, according the latest closely-followed Ifo survey which covers 7,000 companies. Continued weakness in the automotive and chemical industries have been the main factors in this fall in confidence. * SO WHAT? * Germany is the world’s #3 exporter, which makes it particularly susceptible to the vagaries of global demand – so you can see why the whole US-China trade thing is having knock-on effects. If you couple that with other recent data from the federal statistics office which shows falling output, energy production and construction products as well as recently leaked reports that say the economics ministry only expects annual growth of 1% rather than the previously touted 1.8%, it sounds like Germany’s economy is on the rack – which is NOT good for the EU as a whole. If you throw Germany’s weakness, France’s rebellious uprising and Italy’s financial problems into the mix, the future’s not looking particularly great on the continent at the moment.



Apple looks for new opportunities but Nvidia suffers from China blues…

Apple eyes game-streaming service as new battleground (Daily Telegraph, Tom Hoggins) suggests that Apple is looking at making a gaming subscription service, with the idea that it will become a “Netflix for games”. There are no details as to what sort of games they may be but apparently Apple has been looking into this with games developers since the second half of last year. * SO WHAT? * If this proves to be true, it could be a decent boon for Apple’s services business – which includes Apple Music, iTunes, healthcare apps and cloud storage – as it aims to pretty much double existing service division revenues to $50bn by 2020 in order to take up at least some of the slack of sluggish iPhone sales. The company is also hoping to launch its own TV streaming service this year and so I guess, in an ideal world, the two could be announced 

together as a really compelling proposition. I would have thought, though, that a strong games line-up on launch is absolutely key for success – as console-makers will all attest.

Nvidia blames $500m hole on China gaming slowdown (Daily Telegraph, James Titcomb) heralds some bad news from the American chip maker Nvidia as it blamed the economic slowdown in China for its weaker-than-previously indicated fourth quarter revenues. Its chips are used in powerful computers and robotic systems and China is the world’s biggest video games market, especially when it comes to PC gaming as games consoles were banned until 2015. Shares fell by 17% on the news yesterday, meaning that they have actually halved since the summer. * SO WHAT? * I suspect this is going to become a theme – that everyone’s going blame their woes on the “China economic slowdown bandwagon”. Mind you, to be fair, Nvidia said that it wasn’t ALL down to this – it admitted that the high price of its latest graphics cards had put off customers and that companies had delayed spending on data centres.



Tesla gets a slap and the M&S/Ocado thing garners continued interest…

In Saudi Arabia slashes exposure to Tesla via hedging deal (Financial Times, Arash Massoudi and Richard Waters) we see that Saudi Arabia has, rather dramatically, cut its exposure to Tesla only four months after founder Elon Musk settled charges relating to the kingdom allegedly being ready to back a management buyout. The Saudi Public Investment Fund hedged most of its 4.9% stake in Tesla in a technical trade which basically means that although it still holds the shares, it cuts its exposure to the downside drastically. Musk tried to brush this aside in an interview with the Financial Times when he said “To the best of my knowledge, there has been no communication with PIF for months…I thought they had probably sold their shares. We don’t know if they own any at all”. Tesla/Saudi Arabia: collars for dollars (Financial Times, Lex) does a great job of explaining the details of the PIF/JP Morgan trade, and surmises that it was done either to lock-in a

long-term relationship with Tesla without having exposure to a volatile share price OR it could be a means to selling a large stake slowly. * SO WHAT? * Musk will probably be hoping for the former scenario to be the case rather than the latter. If it turns out that the Saudi’s have had enough of him, it could be bad for the share price and turn Musk’s headache into a migraine at a very tricky time. I’m not that sympathetic TBH, as he brought the whole situation on himself by shooting his mouth off.

I mentioned early stage talks between Ocado and Marks & Spencer yesterday and a number of broadsheets have had a go at predicting potential future outcomes. Future as a tech provider would be helped by sale (The Times, Deirdre Hipwell) highlights the fact that Ocado’s sudden growth is down to its perceived bright future as a technology provider rather than being an online supermarket and that a deal that would help Ocado focus on this would free up cash to fund further expansion. It also pointed out that Ocado’s contract with Waitrose comes to a close next year and that the M&S talks are a means to persuade Waitrose to extend. FWIW, analysts at Bernstein say that Ocado should sell its British arm as M&S would not be able to provide anywhere near the same volumes as Waitrose, but then it just doesn’t have the financial firepower to do it.



And finally, in other news…

I only seem to tuck into Ferrero Rocher at Christmas, but I think that I might be tempted to buy more in order to have a go at this: Man creates gorgeous sculptures out of Ferrero Rocher wrappers (Metro, Hattie Gladwell https://tinyurl.com/ya65y3pf). Impressive!

Some of today’s market, commodity & currency moves (as at 0836hrs 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 **
6,747 (-0.91%)24,528 (-0.84%)2,644 (-0.78%)7,08611,210 (-0.63%)4,889 (-0.76%)20,627 (-0.11%)2,594 (-0.10%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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