Wednesday 04/09/19

  1. In MACRO NEWS, BoJo loses, UK construction hits a new low and HS2 faces big delays whilst over in Europe, Germany continues to look vulnerable, Italy manages a coalition and Spain tries to avoid an election. Elsewhere, weaker US manufacturing further points to global slowdown
  2. In RETAIL/HIGH STREET NEWS, Lego announces shop openings, M&S exits the FTSE100, Wagamama’s owner announces closures and Walmart stops selling bullets (for some guns)
  3. In INDIVIDUAL COMPANY NEWS, Tesco sells its mortgage business to Lloyds and GKN looks to cut 1,000 jobs
  4. In OTHER NEWS, I give you a trick on when to use who vs. whom. Wild, I know…



So BoJo loses, UK construction worsens, HS2 faces major delays, Germany wobbles, Italy cobbles something together, Spain tries to avoid another election and US manufacturing weakness indicates a slowdown…

So you’ll be waking up this morning to news that Boris Johnson was defeated in his bid to keep no-deal on the table in Brexit negotiations, despite threatening to deselect Conservative MPs as candidates in the next election. What’s next after crushing Tory defeat on no-deal Brexit? (Financial Times, George Parker) says that the next step is for MPs to vote today on emergency legislation that would stop a no-deal Brexit and seek an extension to the Article 50 process until January 31st. The bill would then have to go through the House of Lords and if it passes that hurdle, it will go to the Queen for Royal Assent. Johnson could try to push for a snap election on October 14th or 15th before the bill becomes law so that he can go to Brussels a few days afterwards to hammer out a better deal with a better majority. However, in order to do this, Johnson would need the support of two-thirds of MPs under the 2011 Fixed Term Parliaments Act – which would necessitate the support of Labour MPs. Could he win if there was an election? Obviously, he thinks so, but the result is anyone’s guess as he might win some Labour seats in Leave-voting heartlands, but he would lose Conservatives seats as well with perhaps the LibDems gaining in the south and Labour strengthening in big cities. A commons majority is not a certainty by any means.

As if all the Brexit malarkey wasn’t enough to contend with, UK construction reports biggest fall in new work since 2009 (The Guardian, Phillip Inman) cites the latest IHS Markit/CIPS UK construction PMI survey which shows that the British building industry saw its biggest fall in new work since March 2009 when the UK was in recession following the financial crash. This survey measures total activity in the sector and shows that construction fell for the fourth month in a row led by office building and general maintenance. Having said all that, there haven’t been any major job losses and companies seem to have kept their recruitment plans steady – which has probably been the case because Brexit has resulted in a widespread shortage of workers. Clearly, this is a sector like many others that needs clarity on Brexit.

Then in HS2 to be delayed by up to 7 years, government admits (Financial Times, Jim Pickard and Gill Plimmer) we see that the embattled HS2 high-speed rail link between London to the North will be delayed and see costs rising to

up to £88bn versus the original budget of £55.7bn at 2015 prices. * SO WHAT? * Have we reached the point where it’s now too late to turn back? A review led by former HS2 chairman Doug Oakervee is due to make recommendations by Christmas as to whether the project should continue and, if it does, how it will proceed from here. Cheaper options include using slower trains (trains are currently designed to run at 249mph) or stopping the line at London’s Old Oak Common that will avoid having to tunnel under the capital to Euston station. Over £7.4bn has already been spent on HS2 even though construction of the track and tunnelling hasn’t started yet. We’ll just have to wait and see!

With all this going on in the UK, it’s a good job that Europe’s OK. Haha. NOT 😜. Brexit weighs on Germany’s export-dependent manufacturers (Financial Times, Martin Arnold and Valentina Romei) highlights Germany’s current economic vulnerability as it is suffering from Brexit-related problems (exports to Britain fell by 21% quarter-on-quarter – the steepest fall since the financial crisis) as well as Trump’s tariffs on car imports. Exports account for 47% of Germany’s GDP versus around 30% for Britain and France and 12% in the US – so you can see why this is a problem. Then Five Star members approve Italy coalition with centre-left rival (Financial Times, Miles Johnson) shows that a snap election, that was pushed for by the anti-immigration League party’s Matteo Salvini recently, has probably been averted as the anti-establishment Five Star agreed to working with the centre-left PD party but God only knows what’s going to happen here. Still, the hope is that this is a coalition that will be more likely to “play nice” with Brussels who clashed with Salvini on immigration and public spending. Sanchez outlines agenda to woo radical left in move to avert poll (Financial Times, Daniel Dombey) shows that things ain’t great in Spain either as caretaker PM Pedro Sanchez is currently scrabbling around to get the support of the radical left Podemos party to form a “progressive government” in a bid to avoid a general election on November 10th – in what would be its fourth in four years! Sanchez needs to win a parliamentary vote on forming a new government by September 3rd to avoid this fate. Everyone distrusts each other, so the situation is a complete mess at the moment.

US factory activity shrinks for first time in 3 years (Wall Street Journal, Sarah Chaney and Andrew Restuccia) cites the latest figures from the Institute for Supply Management’s manufacturing index, which measures factory activity, and shows that the manufacturing sector actually contracted for the first time since August 2016 and is now at its lowest level since January 2016. * SO WHAT? * Along with a lot of the other data we are getting at the moment, this would seem to provide further evidence for a global slowdown of world trade. The longer the US-China game of tariff “chicken” continues, the worse the situation is likely to get.



Lego decides to invest in shops, M&S falls out of the FTSE100, Restaurant Group announces closures and Walmart stops selling some types of bullets…

Lego builds for future in Asian market despite a fall in profits (Daily Telegraph, Laura Onita) heralds the announcement by toy giant Lego that it will be opening over 160 outlets this year – 40% more than 2018 – as part of an aggressive expansion into China and India. It currently has 500 stores worldwide and last month announced new sites in the UK, France and Netherlands. * SO WHAT? * This is a particularly interesting tactic given that toy retailers such as Toys R Us and Scandinavia’s biggest toy retailer Top Toy have gone bust due to tough trading conditions, so by going against the current Lego is making a strong statement here. Although sales and revenues were up over the first half of the year, profits slumped as the company ploughed cash back into the business. Lego is now the world’s #1 toy maker, having overtaken both Hasbro and Mattel.

In M&S crashes out of blue-chip index (The Times, Ashley Armstrong) we see that M&S has dropped out of the FTSE100 for the first time since the index was created 35 years ago. It currently has over 80,000 staff and 1,035 shops across Britain but has been suffering acutely in the last few years with its apparel offering. The share price fell 1.5% yesterday but it has halved in value over the last three years. Companies need to be ranked 110 or higher to stay in the FTSE100, but yesterday M&S fell to being the 115th most valuable company. It will be joined in relegation to the FTSE250 by Micro Focus and Direct Line and replaced by Polymetal (mining), Hikma (drugs) and Meggitt (Engineering). * SO WHAT? * TBH, I think that dented pride is probably the biggest impact here for M&S. FTSE100 tracker funds will have to sell out, but then other funds will buy it, although net-net it’s probably going to get a bit weaker. Still, maybe being out of the FTSE100 spotlight may be a good thing for the embattled retailer as it tries to

turn itself around. A little bit of humility may go a long way…

High Street gloom continues in Restaurant Group lines up 150 closures (Financial Times, Archie Hall) as the company announced plans to close over 150 Frankie & Benny’s and Chiquito outlets in order to turn its business around. This follows the expensive acquisition last year of Wagamama for £559m and will equate to at least half of the company’s F&B and Chiquito restaurants. Closures are expected to take place gradually given that many locations have years to run before their leases run out. The Restaurant Group’s share price fell by almost 12% on the news. * SO WHAT? * While Wagamama’s was probably a good strategic purchase last year, it came at a very heavy price especially when you consider the carnage that is the casual dining sector at the moment. The company was optimistic about its expanded vegan menu, lower-alcohol options and greater presence on delivery apps as well as the prospects for its Wagamama brand, which is trading in line with expectations. However, Wagamama’s touted US expansion is likely to go on the back burner while the UK business gets sorted.

Walmart to stop selling ammunition for assault-style weapons (Wall Street Journal, Sarah Nassauer) shows that the retailer announced it would not be selling short-barrel rifle ammunition – used in assault weapons and some hunting rifles – or handgun ammo in its stores with immediate effect after selling off current inventories. It expects its market share of ammunition to fall from the current 9% to 6% over time as a result of this. * SO WHAT? * Talk about closing the door after the horse has bolted. Last month, a gunman killed 22 people in a Walmart in El Paso with a semi-automatic rifle and only a week before that a Walmart employee shot and killed two other workers at a Mississippi Walmart store. Walmart is one of many retailers, such as Dick’s Sporting Goods, who have imposed tighter restrictions on gun sales in the last few years but there are still plenty of places (like Cabela’s, Bass Pro and Academy Sports and Outdoors) who still sell semi-automatic weapons and ammo. Funnily enough, the NRA criticised Walmart’s decision saying that “Lines at Walmart will soon be replaced by lines at other retailers who are more supportive of America’s fundamental freedoms”.



Tesco sells its mortgage business to Lloyds and GKN announces job losses…

Tesco leaves home loans with £3.8bn sale to Lloyds (Daily Telegraph, Harriet Russell and Yolanthe Fawehinmi) highlights Tesco Bank’s desire to cut costs as well as the competitive nature of the current mortgage lending market. RBS had been a frontrunner to buy the loan book of 23,000 customers but Lloyds won out in the end. It is likely that investors will see this as a good thing given

that it simplifies Tesco’s overall business and gives Lloyds some more clout in the mortgage market.

GKN Aerospace to shed 1,000 jobs worldwide (The Guardian, Rob Davies) heralds the announcement of worldwide job losses as the company continues with a restructuring that pre-dates its £8bn takeover by Melrose. It said it is making the cuts to streamline the business after a string of acquisitions led to a number of areas of overlap. The company’s chief exec Hans Buthker said that “We are creating a single, fully integrated business aligned to our customers’ needs, which will ensure we are better positioned within the competitive global aerospace market”. GKN Aerospace is part of the larger GKN engineering group that was bought last year by takeover and turnaround specialist Melrose.



And finally, in other news…

I thought I’d leave you today with A Simple Trick for Remembering When To Use Who vs. Whom (Mental Floss, Ellen Gutoskey Sounds boring, but is actually quite useful! For a more extreme example of the importance of correct grammar in the workplace, have a look at this classic sketch from Mitchell and Webb.

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Some of today’s market, commodity & currency moves (as at 0910hrs 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 **
7,268 (-0.19%)26,118 (-1.08%)2,906 (-0.69%)7,87411,911 (-0.36%)5,466 (-0.49%)20,649 (+0.12%)2,957 (+0.93%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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