Wednesday 09/03/22

1. In MACRO & COMMODITIES NEWS, we look at whether Taiwan could be the next Ukraine, the US and UK bans oil from Russia, Shell stops buying Russian oil and we consider what may ensue while talks start with Maduro, nickel goes crazy and food inflation looms
2. In ACTIONS & CONSEQUENCES, McDonald’s makes a McExit and luxury firms leave while Russian banks, payments and exports take a hit as China looks like it’ll be hoovering up
3. In M&A NEWS, Orange and MasMovil consider forming a Spanish giant and Google buys Mondiant
4. AND FINALLY, I bring you the cutest thing ever…

So Taiwan gets spooked, more Russia bans are announced, nickel goes crazy and food price inflation looms…

The crisis in Ukraine is beyond words. Many stories that we see now of tragedy, sacrifice and loss make everything else pale into insignificance. However, I will continue to bring you news on this and everything else in the business and financial markets news because it may well have repercussions that have major consequences for us all and that we still need to understand better.

Ukraine war serves as wake-up call for Taiwan over China threat (Financial Times, Kathrin Hille) highlights unease in Taiwan as fears heighten that it will be to China what Ukraine is to Russia. Citizens are taking warnings from the Chinese Communist party much more seriously now, especially as China continues to engage in air and naval manoeuvres close to the island – “Ukraine today, Taiwan tomorrow”. Also, the US’s reticence in actually sending troops into Ukraine makes them realise that they may be more vulnerable to attack than had been thought previously. There is even talk of reintroducing conscription. * SO WHAT? * From a commercial perspective you do wonder what an invasion of Taiwan could mean. It is a major manufacturer of consumer electronics and semiconductors, for instance, and it does make me wonder whether there will be a quiet move to build manufacturing facilities elsewhere within Asia and beyond to minimise the chaos a potential invasion could cause. Given the recent semiconductor shortage, you would have thought that this may also prompt non-Taiwanese semiconductor manufacturers (e.g. Samsung, Intel, ST Microelectronics, Infineon etc.) to accelerate their progress in adding new production (if, indeed, they can go any faster) as the supply of chips has been a problem for some time already.

Meanwhile, US and UK ban Russian oil and gas imports in drive to punish Putin (Financial Times, James Politi, Myles McCormick, Jim Pickard and Andy Bounds) shows that sanctions have been stepped up yet again although the EU has opted against going the whole hog and plumped, instead, for a phasing out of Russian oil imports by two-thirds within a year. Shell to halt buying Russian oil and gas and Unilever stops sales in Russia (The Guardian, Julia Kollewe and Jasper Jolly) shows that the oil supermajor has announced plans to pull out of Russian oil and gas – going one step further than disposing of chunky stakes in Russian oil and gas extraction projects. It said that it will cease all spot purchases of Russian oil and gas, close 500 service stations and its aviation fuels and lubricants business in the country. I would highly recommend that you read the full version of The West can survive a blockade of Russian oil and gas. But Putin’s offensive in Ukraine cannot (Daily Telegraph, Ambrose Evans-Pritchard) if you can (I am no relation and I have no agenda here – I just think he always has well-argued interesting views) because it offers a very interesting insight into how an oil embargo would affect the West. He suggests that Europe will eventually fall in with the US and UK on Russian oil imports because its current stance, which basically says that it will continue to do business with Russia even as more Ukrainians are killed, is morally untenable. He adds that a blockage of Russian oil and gas will make a serious offensive war in Ukraine impossible beyond a few weeks as oil and gas account for 40% of Russia’s state budget and will inflict damage to the extent that the country may not be able to pay its troops. On the other side, Russia is now threatening to cut off Europe’s gas – but this isn’t a particularly ominous threat because

of milder weather and a sudden increase in deliveries of US LNG have blunted that line of retaliation as European gas storage levels have returned to normal levels after running dangerously low in January. There is speculation that China will step in and buy Russian oil instead, but it will not be able to do this quickly enough because Chinese refineries are not used to “heavy” Russian crude and delivering the stuff is proving to be a nightmare due to ports banning Russian ships. Pulling the plug on Russian oil and gas won’t be a smooth ride for consumers (The Guardian, Nils Pratley) highlights tricky times ahead but Maduro hails ‘cordial’ talks with US as west seeks new oil supplies (Financial Times, Gideon Long) shows that the US is already seeking out alternative sources of oil – with controversial President Nicolás Maduro. * SO WHAT? * Inflation is just going to continue to sky-rocket as higher fuel prices will further hit consumers as resulting higher costs will inevitably be passed on to them.

As if this wasn’t dramatic enough, London Metal Exchange halts nickel trading after short squeeze (The Times, Ben Martin) shows that dramatic action was taken yesterday as trading of the metal was suspended until Friday at least after its price doubled, breaching $100,000 a tonne. When it does return, the LME is going to put in place circuit breakers that will limit nickel price movements to 10% either up or down to combat recent volatility. Worst crisis in decades for metal traders (The Times, Ben Martin) goes into more detail as the head of market analytics at Marex, a broking group, emphasised just how big a deal this was when he said “This has never happened before in the history of the nickel market”. The market for nickel, which is used to make stainless steel and is a material used in the manufacture of EV batteries, was already tight before the invasion of Ukraine but the prospect of losing a major producer like Russia to sanctions, is clearly freaking everyone out. The current state of the market has been made even worse by a number of Chinese players, including Tsingshan Holding Group (the world’s biggest nickel producer), Huayou and Jintian holding massive short positions. This has meant that some players have been forced to buy for technical reasons to cover their short positions, which pushes the price up even further. Carmakers fear shift to electric could stall as nickel prices soar (Daily Telegraph, Howard Mustoe) highlights immediate concerns from EV makers as this will make expensive EVs even pricier. Crudely speaking, the higher the nickel content in a battery, the further it can go on a single charge. Russia supplies 10% of the world’s nickel and, on average, the cost of an “average” battery would rise from $440 last year to $2,750 at current prices. Insane 😱! * SO WHAT? * What a nightmare. EV prices are already appreciably higher than those of petrol equivalents and so this really could result in an appreciable dent in EV sales at least in the short term. No doubt this will continue to boost the second hand vehicle market, which will be good news for dealerships like Pendragon etc. and Auto Trader.

AND IT DOESN’T STOP THERE EITHER!!! Record wheat prices fuel fears over food inflation (The Times, Louisa Clarence-Smith, Ashley Armstrong and Dominic Walsh) shows that wheat prices hit new highs again yesterday as the world is facing the prospect of a grain shortage due to potential supply disruptions now (because of the war) and in the future (because Ukrainian farmers sow wheat in March and April, but can’t do that now). Greggs to put up price of sausage rolls despite record sales of £1.23bn (The Times, Ashley Armstrong) shows just one example of a wheat consumer who is going to have to put prices up – and it won’t be the only one. * SO WHAT? * Again, along with other massive commodity price rises, this is going to squeeze household budgets even more than they are being squeezed already. And you can’t even get a cheesy bean bake to console yourself…

McDonald’s and others head for the exit and Russian banks hit hard times while China hangs around for bargains…

The mass exit continues in McDonald’s leads fresh exodus of brands from Russia (Financial Times, Andrew Edgecliffe-Johnson and Matthew Rocco) as the fast food supremo has joined an array of consumer brands including Coca-Cola, PepsiCo, Starbucks and Unilever in halting or cutting operations in Russia as it announced that it would temporarily close all of its 850 outlets in the country and suspend other operations. Luxury giants from Cartier to Hermes shut up shop (Daily Telegraph, Laura Onita) highlights the exodus of purveyors of luxury in response to the war as Hermes, Richemont (which owns Cartier), LVMH, Chanel, Burberry and Kering (which owns Gucci) have all suspended operations. Interestingly (but probably unsurprisingly) they were not as vociferous at the current events as the likes of H&M, Nike and Asos, but they are voting with their feet. This shouldn’t hurt them too badly, though, as Russia only accounts for about 3% of overall luxury sales (according to Jefferies) and sales are just 6% of what they are in China (the #1 market) and 14% of the spend in America.

Consequences continue in Russia’s banks turn from global ambitions to survival (Financial Times, Owen Walker) which shows that the targeting of previously powerful banks like Sberbank and VTB with sanctions is starting to have an effect. Both banks are pulling out of Europe but it is thought that domestic operations are going to suffer even more as worried customers try to withdraw all their cash. In Sberbank’s case, not only does it keep the bulk of household savings, it is the main provider of credit lines to Russian companies because of its size and capital. This role is now looking decidedly tricky as sanctions strangle the bank that was, until recently, Europe’s second most valuable bank by market cap behind HSBC! VTB, on the other hand, has acted as the state’s investment bank, helping Russian companies raise money on international markets. * SO WHAT? * Neither bank is likely to fail as the state is bound to prop them up given their importance, but current (and likely, future) sanctions are likely to clip the banks’ wings global ambitions. They will probably have to focus more on domestic business and perhaps Asian markets where they face less resistance.

I thought it was worth including Russia/payments: China is no shelter from sanction storm (Financial Times, Lex) because there’s been a lot of chat recently about China

stepping in to help Russia with being kicked off SWIFT and cut off by Visa, Mastercard and Amex. This article contends that prospects for a joint effort by Russia and China to build a rival financial infrastructure is unlikely to work (certainly in the short term). Although Russian banks say that their cards can be powered by state-controlled UnionPay, a switch would require a new IT infrastructure, which will be difficult to execute given that the likes of the US and Korea are currently imposing sanctions. China’s Cross-border Interbank Payment System (Cips) is not a substitute for SWIFT either as the latter is a messaging system used by over 11,000 institutions in 200 countries, Cips promotes global use of the renmimbi by settling payments in the currency – but over 80% of its transactions rely on SWIFT! * SO WHAT? * OK, so for now, things aren’t looking good. Further out, it is possible that this will prompt both China and Russia to intensify efforts to make their own systems robust. I’d say that this will be more difficult for Russia due to likely ongoing sanctions, but the question is whether China will put much effort into it. If that happens, you would have thought that Russia will become increasingly dependent on China, which China may quite like…

Consequences are further discussed in Curbs on Russian exports raise risk of oil shock and recession in Europe (Financial Times, Chris Giles) as the rise in oil and gas prices is in danger of resulting in levels of stagflation (where GDP slows down and both inflation and unemployment remain high) not seen since the 1970s. Many believe that Europe, Japan and emerging economy oil consumers will be particularly hard hit while the US can at least rely more now on domestic oil production. In the meantime, China ready to snap up heavily discounted companies in fire sale (Daily Telegraph, Louis Ashworth) makes the interesting suggestion that China stands ready to buy Russian bargains in energy and commodities that seem to be getting cheaper by the day as the rouble continues to plummet. * SO WHAT? * The sheer number of companies pulling out of Russia – and the fact that they are all doing this at the same time – means that there are already (and will continue to be) some MASSIVE investment opportunities with buyers that have no scruples about the invasion of Ukraine. I have said before that I believe that professional service companies won’t leave Russia completely because there will just be so much M&A activity going on that they will really want to get a piece of the action. I may well be wrong here, but I wonder whether western companies with Russian businesses can overtly take their name off the door in Moscow, give it a Russian-sounding name but retain at least a majority interest. We’ll just have to wait and see, but for now many are taking the moral high ground. 

A Spanish giant is about to form and Google boosts its cloud…

In other news today, Orange and MasMovil in exclusive talks to form €19.6bn Spanish joint venture (Financial Times, Anna Gross) shows that the two companies are in exclusive talks to combine their Spanish businesses as Europe’s fragmented telecoms business tries to consolidate. This is a slap in the face for Vodafone that had been hoping to take part. Spain’s biggest operator is Telefónica, then Orange, Vodafone and MasMovil. The combination would mean the combined entity would leapfrog Vodafone. Orange/MasMovil: everyone expects the Spanish acquisition (Financial Times, Lex) says that it this deal is approved by regulators it’ll spark a flurry of M&A deals as this fragmented sector consolidates in order to provide better returns.

Then in Google buys cyber security company Mandiant for $5.4bn (Financial Times, Hannah Murphy, Richard Waters and Madhumita Murgia) we see that Google has announced an all-cash acquisition that will put it at the forefront of the battle against digital warfare and cybercrime. Mandiant is one of the best-known threat intelligence providers. Google/Mandiant: cyber security buy will bolster underweight cloud unit (Financial Times, Lex) says that this deal will really help Google catch up with Microsoft and Amazon’s AWS and a boost in revenues from its cloud division will help it diversify away from advertising that is likely to get trickier due to increasing regulator focus and changing rules. The question now is how long it will take for this deal to get approval…

…in other news…

I know that Watson’s Daily is a hard-headed yet fun-loving newsletter about business and financial markets, but in times like this I think it’s good to take a moment out from the chaos and watch things like THIS. Ah. The interaction between cat and new dog. It’s what a lot of us need right now I think! This is simultaneously relaxing yet peppered with the odd moment of drama…

But if this is too mushy for you, how about THIS different interpretation of the dramatic O Fortuna. I guarantee you’ll never listen to it in the same way again 🤣!