Wednesday 22/06/22

  1. In MARKETS, MACRO & ENERGY NEWS, Wall St has a ‘mare, the US economy heads towards recession, SE Asia’s economy rebounds, coal demand rises and plans are afoot for more mini-nukes
  2. In FINANCIALS NEWS, we look at US banks’ stress tests, Visa/Mastercard’s investigation and the crypto situation
  3. In RETAIL/CONSUMER NEWS, US retailers notice trends while UK consumers face higher bills and farmers leave food in the ground
  4. In MISCELLANEOUS NEWS, Kellogg decides to split itself, a new vaccine centre’s coming to the UK, Germany digs its heels in on combustion engines and Glencore faces the music for bribery
  5. AND FINALLY, I bring you a tricky situation…

1

MARKETS, MACRO & ENERGY NEWS

So Wall Street suffers, the US economy looks vulnerable, South East Asia is rebounding, coal demand is set to rise and there’s a new type of mini nuclear reactor…

*** Hey there! Did you know that we’ll be publishing our 500th episode of the “Commercial Awareness with Watson’s Daily” podcast today 🎙?? If we averaged 20 minutes per episode, that’s 10,000 minutes of content 🤯!?!? Thank you so much for your support over the last two years – it means a lot! Thank you to all my co-hosts and guests who’ve appeared over that time – without you, it would just be me droning on on my lonesome. It is soooo much more fun to talk to people! Watch this space for events, celebrations, giveaways etc. to mark the occasion! ***

Wall Street suffers worst start to the year since the Depression (Daily Telegraph, Tim Wallace) highlights Wall Street’s poor first half as the S&P 500 is down by 22.3% on a total returns basis, edging ahead of the 22.2% fall in the first half of 1962. It is also worse than the 19% fall in 1970 (at this time, US inflation was at a 20-year high) and the 17% fall in 1940 (when Germany invaded France). All of those dramatic falls preceded big rebounds, but it’s not a given as to whether that will happen this time because of external macroeconomic pressures that continue to intensify. The gloom continues in US economy ‘closing in on recession’ (The Times, Callum Jones) as Goldman Sachs reckons that the chances of recession in the next 12 months has doubled from 15% previously to 30%. This is because Goldman reckons the Fed is now going to prioritise inflation over growth by making dramatic rate hikes. Elon Musk says ‘inevitable’ US recession will probably come soon (The Guardian, Dan Milmo) is even more pessimistic as he says it is “more likely than not”, but then again he would say that as he is planning to cut 10% of his salaried workers over the next quarter…

*** NEWS JUST IN – the latest data from the ONS says that UK inflation is now at 9.1% (up from 9% in April), meaning that it is now at its highest level since February 1982, when it hit 10.2%. ***

It’s not all bad everywhere, though, as South-east Asia bucks global stagflation trend as tourism and exports climb (Financial Times, Andy Lin and John Reed) shows that in four of the six biggest economies in the Association of Southeast Asian Nations – GDP is actually growing faster than inflation! Vietnam, Malaysia, Indonesia and the Philippines are all rebounding after a protracted period of strict lockdowns and seeing industries like tourism rise from the ashes. Thailand and Singapore are still seeing inflation rise faster than GDP because consumer demand has been blunted in Thailand and Singapore is being held back by the impact of recent China lockdowns. The region is seeing a pickup in output and exports as it leans into rising food, fuel and commodity prices because Indonesia and Malaysia produce palm oil, Thailand and Malaysia produce rubber and Indonesia produces coal. They are also benefiting from manufacturers diversifying supply chains out of China whilst staying within the wider region.

Speaking of coal, Coal spending to surge as world shuns Russian gas (Daily Telegraph, Rachel Millard) cites conclusions from the International Energy Agency which suggest that global spending on coal projects will rise by 10% this year in the desperate scramble to boost energy security. It expects notably higher spend from China and India as the latter in particular wants to avoid the electricity rationing it had to endure in 2021.

Then in Plan to build mini reactors running on nuclear waste (Daily Telegraph, Howard Mustoe) we see that a start-up called Newcleo is aiming to make clean energy from 140 tonnes of waste plutonium deposited in Sellafield in a new reactor design that could rival the SMRs being touted by Rolls-Royce. * SO WHAT? * This is particularly interesting because of its process using elements that normally have to be put underground. Not Very Fun Fact: the UK has the biggest civil plutonium stockpile in the world, including material from other countries. Newcleo is still pretty small in the scheme of things, but this sounds exciting and could easily complement existing reactors and, of course, Rolls-Royce’s.

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

FINANCIALS NEWS

US bank stress tests come into focus, Visa and Mastercard face scrutiny and crypto’s weakness could play into the hands of the regulators…

In US banks’ ability to ride out downturn in spotlight as recession fears grow (Financial Times, Joshua Franklin) we see that the Fed is due to publish the results of the industry’s annual stress tests which measure how well they can cope in the event of a major economic downturn. The test itself covers 34 banks including Goldman Sachs and JP Morgan Chase and will indicate how much they can pay out in dividends and share buybacks without over-reaching themselves. US subsidiaries of foreign banks also have to undergo the tests and Credit Suisse is under particular scrutiny because of recent scandals. * SO WHAT? * Following the publication of last year’s tests, banks engaged in a raft of dividend payouts and share buy backs due to optimism about a rebound, but it is thought that this time will be different given the gloomy economic outlook.

Elsewhere, Visa and Mastercard investigated over fees surge (The Times, Patrick Hosking) shows that the two card giants are going to be investigated by the Payment Systems Regulator (PSR) after more than quintupling some cross-border transaction fees (called

“cross-border interchange fees”) since Brexit. The combined networks of the companies  covers 99% of all credit and debit card payments in Britain. Of particular concern are the rising fees being paid by merchants that are then passed on to consumers. Ironically enough, the fees had been capped by an EU agreement which then lapsed on Brexit. Just to give you an idea, the fee on UK/EY credit card transactions went from 0.3% of the purchase value and for debit cards it went from 0.2% to 1.15% and were imposed on consumers in the UK and Europe. * SO WHAT? * Mastercard said that it was committed to working with the PSR and Visa emphasised said that it was facilitating the most cost-effective and secure ways to pay and be paid, but let’s be honest they surely saw a fantastic opportunity to make a ton of money while everyone was distracted by the chaos of Brexit and took it. It’ll be interesting to see whether the PSR has the balls/clout to put a stop to this.

Then in Terraform: crypto collapses lessen pressure on banks and regulators (Financial Times, Lex) we see an interesting argument – that the recent cratering of cryptocurrencies is effectively taking the pressure off central bankers to develop their own digital currencies and that regulators will now face an easier industry to bring under control after the industry’s chastening. It certainly seems likely that crypto companies may be more compliant with regulators, but as I keep saying, actions are needed here rather than hot air and “I told you so’s”.

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

RETAIL/CONSUMER NEWS

US retailers see changing behaviours, UK consumers continue to face resistance and farmers get frustrated…

US retailers face shake-up as consumers trade down to beat rising prices (Financial Times, Ben Glickman) shows that retailers are noticing that US consumers are migrating to cheaper products as the highest inflation for 40 years continues to bite. US retailer Kroger has noticed that like-for-like sales of its store brands were up by  6.3% in the latest quarter versus total growth – excluding fuel – of 4.1%. Other retailers including Best Buy, Costco and Dick’s Sporting Goods are all noticing the same trend. * SO WHAT? * This is interesting, yet hardly surprising. In the US, retailers like Aldi, Dollar General, TJ Maxx and Walmart should stand to benefit from this thriftiness but I do wonder how consumer goods companies like Reckitt Benckiser, Unilever and P&G will do as they experience increased push-back on their price hikes. I am sure we will see (and are probably already seeing) a similar shift in the UK, which is why, however hard they try, I think incumbent supermarkets like Sainsbury’s and Tesco will see their market share erode at the expense of a resurgence of Aldi and Lidl.

Although I have already said this (or a variation of this) for quite some time now, I have to say again that UK consumers continue to

face bigger challenges. Annual cost of heating a home to top £3,000 this winter (Daily Telegraph, Rachel Millard) cites predictions by energy consultancy Cornwall Insight and Another £380 on annual bills as grocery price rises hit 13-year high (The Guardian, Sarah Butler) cites the latest data from Kantar which highlights higher food prices after the UK’s grocery trade body said they could hit their highest level for over 20 years. Interestingly, Kantar’s data also showed higher sales of supermarket own-label goods (up by 12%) and consumers switching to Aldi and Lidl. All of this makes Fruit farmers crops left to rot amid staff shortage (Daily Telegraph, Hannah Boland) particularly galling as supplies of fruit such as apples and pears could be squeezed by not having enough pickers. * SO WHAT? * Consumers need help. The same amount of money is buying us less, wage increases are falling short of inflation and utility bills look set to keep rising. Although people will be tempted to move jobs to get above-inflation pay increases, they need to choose wisely to make sure they don’t fall foul of “LIFO” (Last In First Out) when/if a downturn hits and unemployment starts to go in reverse. Also, I think that the government needs to put its money where its mouth is re agriculture – if we are to be more self-sufficient in terms of food, we have to have the workers!

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

MISCELLANEOUS NEWS

Kellogg wants to split, there’s good news for vaccines in the UK, Germany resists pressure and Glencore pleads guilty to bribery…

In a quick scoot around other interesting stories today, Kellogg splitting into three companies as it shifts focus to global snacks (Wall Street Journal, Annie Gasparro) shows that the cornflake maker has outlined plans to split into three listed companies: its core snacks business, the North American cereals business and a plant-based food business. The plan is to complete the split by 2023 and I would have thought that this would be attractive for investors who will find the business less unwieldy and more transparent as a result. * SO WHAT? * This seems to continue the trend of mega-conglomerate breakups following similar announcements from General Electric and Johnson & Johnson last year. As far as I am concerned, these things seem to go in waves. At some points in the cycle, scale is good and companies hoover up rivals and new businesses alike, but it now seems that we are at a point where slimming down and specialisation are key. It’ll be interesting to see whether there is more consolidation in certain sectors that need a bit more size (meat alternatives?) and can take on the businesses that are being ditched by the conglomerates.

Elsewhere, UK signs £1bn deal with Moderna for new vaccine centre (Financial Times, Hannah Kuchler and Sarah Neville) shows that the UK government is working with Moderna to make our first manufacturing centre for messenger RNA vaccines. This would help secure domestic supplies for mRNA vaccines that have proved to be so crucial to fighting Covid. A ten-year deal will be finalised this summer and includes R&D.

Then in Germany rejects ban on combustion engines in EU (Daily Telegraph, Simon Foy and Tom Rees) we see that there is resistance in Germany to ban the sale of new cars with combustion engines from 2035, with the country’s finance minister branding this “the wrong decision” and then saying “Germany is not going to agree to a ban on combustion engines”. * SO WHAT? * Given that Germany is a key manufacturer of cars, I don’t think it is particularly difficult to see why it wants to give itself some wiggle room particularly given a likely economic slowdown and ongoing supply chain problems.

Another story that made the headlines today was Glencore pleads guilty to bribery (Daily Telegraph, Matt Oliver and Rachel Millard), which shows that the company has admitted to seven counts of bribery yesterday following a protracted investigation by the Serious Fraud Office. Basically, Glencore paid tens of millions of pounds to corrupt foreign government officials via various middlemen to “grease the wheels” in places like Nigeria, Cameroon, the Ivory Coast, Equatorial Guinea and South Sudan. What is particularly interesting here though is the ongoing pursuit of individuals who sanctioned the payments. * SO WHAT? * TBH, oil companies and mining companies have been doing this sort of thing forever. As long as there are big contracts to be given and corrupt officials who like money are around, I don’t think this practice can be completely stamped out. Many see it as a necessary cost of doing business in some parts of the world. Glencore got caught in the cookie jar. I don’t think they will be the 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…

Today, I thought I’d bring you a situation that I’ve faced before, but on a whole other level – and it ain’t pretty in Mum spends three hours cleaning up ‘carnage’ as kids cover house in bean bag balls (The Mirror, Amber O’Connor and David Adamson). OMG! Anyone reading this out there with small children will get chills reading this! Beware of bean bags…

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Some of today’s market, commodity & currency moves (as at hrs 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 **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

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