Wednesday 15/04/20

  1. In MACRO & COMMODITIES NEWS, the IMF tells us what we already know, talks abound over an exit strategy, South Africa cuts interest rates to record lows, Sunak looks at more measures and we look at what’s going on in oil, lithium and coffee
  2. In CARS & PLANES NEWS, Renault pulls out of its China JV, carmakers aim to open European plants, US airlines get bailed out while Wizz Air, Norwegian and Boeing hit serious turbulence
  3. In OTHER NEWS, we see software “winners”, downbeat US banks and trouble on the UK high street
  4. AND FINALLY, I bring you an idea for a fulfilling DIY project…



So the world faces crisis (we know), Cali talks exit strategies, South Africa cuts interest rates, Sunak ponders more ways to help and we see the latest in oil, lithium and coffee…

Worst slump since 30s (The Times, Philip Aldrick) highlights the IMF stating the bleedin’ obvious (as usual) – which is that the longer this outbreak continues the worse things are going to get. It is now expecting the deepest global recession since the 1930s. Meanwhile, in California outlines plan for life after lockdown (Financial Times, Hannah Murphy, Lauren Fedor and Joshua Chaffin) we see that California has just become the first US state to come up with a roadmap for exiting the current coronavirus lockdown. Governor Newsom said that he would only lift the strict stay-at-home order if certain conditions were in place, such as making sure that there were better protections for the vulnerable, that hospitals were prepared for a surge, that systems were in place to communicate quickly with citizens etc. None of this will come to pass for at least the next few weeks as the state wants to hang on to its relative success in combating the outbreak thus far. Clearly, everyone will be watching what California does very closely as it has seemed to get things right so far.

Elsewhere, South Africa’s central bank slashes rates to post-apartheid low (Financial Times, Joseph Cotterill) highlights the bank’s surprise decision to cut its main interest rate by 1% to 4.25% – less than one month after another cut. This emergency cut shows just how tricky things are getting in the country, although the central bank is still maintaining its inflation target. * SO WHAT? * South Africa’s economy was already looking pretty shaky before the outbreak, but things haven’t got any easier as the country’s debt was downgraded to junk status last month (which makes debt financing more expensive) by ratings agency Moody’s. The Rand has lost over 20% of its value versus the US Dollar so far this year as investors have ditched riskier currencies to buy “safe haven” assets like the Dollar, Yen and gold.

In the UK, Chancellor open to boosting SME bailout scheme (Financial Times, Daniel Thomas, Alice Hancock and George Parker) shows that Rishi Sunak is still working on the much-criticised emergency loan scheme for SMEs and looking to European countries that have implemented more successful schemes for inspiration. Plan to extend Help to Buy to kick-start housebuilding (The Times, Louisa Clarence-Smith) shows that the government is also looking at helping the construction industry and housing market once normality returns. * SO WHAT? * I think this would be a sticking plaster measure for a gaping wound, but may work if it is part of a broader package. Help to Buy is all very well, but people still have to scrape together a deposit – and the lockdown may well have caused any savings to leach away. On the plus side (for buyers), I would have thought that house prices will get weaker but then again this may mean housebuilders are less keen to build. It’s still early days yet, though.

In the world of commodities, Oil tumbles below $30 despite cuts in production (The Times, Emily Gosden) shows that the market is not convinced by the announcement of production cuts following a weekend meeting between Opec and non-Opec oil producing countries as prices weakened further. Shale fields lurch from boom to bankruptcy (The Times, James Dean) shows how the American oil industry has gone from potentially having the highest oil exports since the 1940s this year to its shale industry being on its knees as a result of the continued weak oil price. Shell pulls out of deal to drill for oil in Arctic (Daily Telegraph, Ed Clowes) shows yet another oil major pulling out of a project due to low prices making it uneconomical. It has dropped a deal with Russian energy giant Gazprom to develop oilfields in the Yamal-Nenets region. * SO WHAT? * All of this is bound to continue as the oil price appears to have no upside at the moment. This is why Trump is sticking his oar in and trying to chivvy things along between the oil producers – he WANTS them to come to an agreement to at least put a floor on prices so American oil producers can survive (they need a higher oil price than the others due to higher costs of production). He can see his oil industry going down the toilet (relatively speaking) as Russia and Saudi Arabia’s expensive game of chicken has successfully turned the screws on US competitors. Although they are feeling the pain themselves, it is far worse for the Americans.

In other commodity news, Tianqi looks to sell stake in world’s largest lithium mine (Financial Times, Henry Sanderson and Jamie Smyth) shows that China’s Tianqi Lithium is preparing to sell some of its majority stake in the world’s biggest lithium mine in order to pay down debt incurred in its global expansion drive. It currently holds 51% of Talison Lithium. * SO WHAT? * It seems like Tianqi just expanded too quickly in its journey to become a major player in the material most commonly used in rechargeable batteries. It has made a number of acquisitions over the years, one of which was for a $4.1bn stake in Chile’s biggest lithium company SQM in 2018 which was largely financed from a $3.5bn loan from China’s Citic Bank. This may well be a painful move for Tianqi as every potential buyer will know that the company is essentially a forced seller. After all, would YOU want to sell your interest in lithium as the take-up momentum in such technologies is starting to ramp up in a market where many buyers have a great excuse (coronavirus) to low-ball you on price?

There’s bad news for coffee lovers out there in Coffee climbs as locked-down customers seek caffeine fix (Financial Times, Emiko Terazono) which shows that coffee shipments to Europe and North America have shot up. Although demand fell initially as China’s cafés closed down, prices have perked up again as roasters including Nestlé, JAB and Lavazza have been buying beans like crazy. * SO WHAT? * The price of arabica beans has gone up by 20% since the beginning of February – compare that with oil prices falling by over 40% over the same time period! Oil clearly needs to wake up and smell the coffee. All eyes will be on the harvests in Colombia (which starts this month) and Brazil (which starts next month). Coronavirus has caused logistical challenges thus far, but demand continues to be strong.



Renault pulls out of its China JV and European makers look at how to restart production while US airlines get bailed out and others continue to suffer…

Renault pulls out of China joint venture as sales disappoint (Financial Times, David Keohane, Peter Campbell and Christian Shepherd) shows that Renault has given up on ambitions to sell petrol cars in China and will now concentrate on electric cars and light commercial vehicles there instead. Dongfeng will buy it out of its 50-50 JV. It has been late to the party in China and failed to benefit to the extent that VW and General Motors have – although PSA Group (which owns Peugeot and Opel) and Fiat Chrysler have also lagged. In happier news, Toyota, Renault and Volkswagen to reopen European plants (Financial Times, Peter Campbell) shows that many of the world’s biggest carmakers are starting/planning to open a number of plants after every major maker shut theirs down last month to protect workers and limit the damage caused by vanishing demand and supply chain problems. * SO WHAT? * It’s probably good that Renault made the tough decision re its Chinese JV as it just wasn’t really working – and although it’s good to hear rumblings of a return to some form of normality for production, you do wonder who

is going to be buying cars in the current economic climate. Car sales were already trending down despite world economic momentum picking up, so given that cars are a big ticket item you do wonder where the demand is going to come from in the short to medium term.

US airlines accept bailout (Daily Telegraph, LaToya Harding) heralds an important development for America’s largest airlines including American Airlines, Delta, United Airlines, Southwest, Alaska and JetBlue as they have agreed to accept a $25bn bailout deal from the US Treasury Department. This will mean that airlines will be able to continue to keep staff and pay them until September 30th.

In Europe, Wizz Air cuts fifth of workforce and reduces wages (Financial Times, Peggy Hollinger) shows that the Hungarian low-cost airline is having to announced major cutbacks to conserve cash and Norwegian’s shares take 60pc nosedive as the airline seeks bailout (Daily Telegraph, Simon Foy) shows that the Norwegian low-cost airline is desperately trying to get some kind of bailout in order to survive. Given the current nightmare situation for all carriers, Boeing loses plane orders as coronavirus hits global air traffic (Wall Street Journal, Doug Cameron) is hardly surprising. * SO WHAT? * The whole industry is under enormous pressure at the moment but there’s not much it can really do until travel restrictions are lifted and it gets its hands on state aid which I think is a necessity for any chance of long term survival.



Software companies benefit, US banks are downbeat and problems continue on the UK high street…

Software stocks emerge as downturn winners with work shifting online (Financial Times, Richard Waters) highlights the resilience of software companies who have been weathering the coronavirus crisis and thriving. A shift in selling software licences to selling software subscriptions has helped cloud software-related stocks and working from home has benefited companies such as Zoom, Citrix and Equinix. * SO WHAT? * Whether this uptick will continue once things get back to normal is a moot point. Although subscription revenues have helped companies, it is likely that cash-strapped customers will try to push prices down. Still, I think that overall these companies will continue to benefit as I believe that working from home will become much more prevalent in the future.

This week is a big week for US banks as it is the beginning of the quarterly reporting season. JP Morgan, Wells Fargo

profits tumble as banks brace for a recession (Wall Street Journal, David Benoit and Ben Eisen) shows that the outlook is bleak. Having said that, they have yet to see a rush of bad loans thus far – although they are preparing themselves for the worst. * SO WHAT? * Banks are seen as a bellwether for the health of the economy, so everyone will continue to monitor other banks’ performance carefully as the week goes on…

The nightmare continues for UK high street players in Next shuts website for the day only hours after reopening (The Guardian, Sarah Butler) which shows that the fashion retailer had to close its website as its order limits were reached in only one hour! Continuing with apparel, Warehouse and Oasis left on the brink of collapse (Daily Telegraph, Laura Onita and Simon Foy) shows that the two retailers are on the verge of bringing in the administrators and Lockdown forces pubs chain into bank talks (The Times, Robert Lea) highlights difficulties for Mitchells & Butlers, the owner of All Bar One, Nicholson’s, Harvester and Toby Carvery. Prolonged closures are putting them in danger of not being able to meet their lending agreements so they are now trying to negotiate with their banks. The tough times continue…



And finally, in other news…

I know that some people are using lockdown as a time to catch up on some of the jobs they wouldn’t normally get around to – so how about having a go at this: Man transforms staircase into epic wine cellar that can hold over 150 bottles (The Mirror, Courtney Pochin This is IMPRESSIVE!

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Some of today’s market, commodity & currency moves (as at 0736hrs 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 **
5,784 (-1.00%)8,44510,722 (+1.49%)4,529 (+0.49%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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