Wednesday 24/10/18

1. In MACROECONOMIC AND MARKETS NEWS, the EU rejects Italy’s budget and markets take a bath
2. In MANUFACTURING NEWS, both US and UK manufacturing hit hurdles, Dyson goes to Singapore and Tesla gets a double boost
3. In OTHER NEWS, I bring you a grown-up version of the egg-and-spoon race and an annoying game. For more details, read on…

So the EU pushes back and markets continue their losing streak…

EU rejects Italian budget in unprecedented rebuke (Financial Times, Jim Brunsden, Mehreen Khan and Miles Johnson) should be unsurprising given the noises that have come from both sides since Italy submitted its draft budget. This is the first time that Brussels has refused to approve a member state’s draft budget and drives a further wedge between the European Commission and the populist government in Rome. The Italians now have three weeks to submit a revised plan as this one was rejected because it would have involved running a bigger deficit than Brussels is comfortable with. * SO WHAT? * This is currently a political p!ssing contest, but if it drags on as both sides dig their heels in, it is possible that the inevitable increase in the cost of debt could prompt another financial crisis for the eurozone. The EU is arguing that Italy needs to stay within its parameters to avoid a debt spiral and Italy is arguing that it needs to spend its way out of its latest economic rut. Italy is not Greece, but the consequences of a Greek-style crisis could be wider-reaching given it is the third largest economy in the eurozone.

Meanwhile, Oil price and markets fall amid global jitters (The Times, Louisa Clarence-Smith) highlights sudden oil price weakness – with Brent crude down over 5% at one point – along with falls in the US, Asia and Europe. The FTSE 100 is heading for its worst month in a decade and European stocks are at their lowest level so far this year. Oblivious investors finally get the news that it’s important to take stock of world events (The Guardian, Nils Pratley) expresses reasons behind the downward lurch in a more robust fashion, citing the US-China trade war, the unprecedented spat between the EU and Italy and Saudi Arabia’s killing of journalist Jamal Khashoggi – which could lead to all sorts of outcomes. * SO WHAT? * FWIW, I think that US markets have been disproportionately hit by a tech sell-off in that the FAANGS have grown to such an extent that any move – up or down – is magnified. As I have said before, these companies are still making/providing stuff that people want in areas that have very high and expensive barriers to entry – so I really don’t see a tech bubble burst a la early 2000s because back 

then one of the reasons why it burst was because many of them weren’t generating any profit. This is not the case now. On the other hand, I think that the US-China trade war IS having unintended consequences for Trump as the prolonging of his aggressive stance has certainly saved a few US steel mills, but it has also had the knock-on effect of hiking costs for major US companies that employ far more people. The spat between the EU and Italy has the potential to get quite tricky – being made more difficult given that Brexit negotiations are also ongoing – and the Saudi Arabia thing is proving to be a massive can of worms that keeps mutating. When all’s said and done on the latter, I believe that the ultimate effect will be a short-term ceiling on the oil price with Saudi Arabia likely to open the taps and increase oil output to appease outraged western governments who have conveniently turned a blind eye to the treatment of dissidents by Turkey’s Erdogan, Russia’s Putin and North Korea’s Kim Jong-Un. Khashoggi casts a shadow on crown prince’s show (Financial Times, Simeon Kerr, Anjli Raval and Ahmed Al Omran) sums up the cumulative effect of Erdogan’s drip-feed of salacious news on what was supposed to be Crown Prince Mohammed bin Salman’s flagship annual investment conference – that a lot of major Western players didn’t turn up, that the numbers were pumped up by more locals and participants from Africa, Asia and elsewhere in the Middle East than has previously been the case and that the deal chat was more skewed than the Crown Prince would have liked towards oil and oil deals when he’s trying to steer his country away from reliance on the black stuff. Some are saying that recent events highlight the need for someone to be in a position to balance out the power that the young Prince wields, but given that he’s spent the last two years consolidating it, this will probably be a tall order. I know that this may sound rather cold, but I think that there are too many parties with too much vested interest to let this affect relations with the kingdom for too long, so I believe that it will all blow over in the medium term with the Saudis getting nothing more than a slapped risk. What it does show, however, is how canny Erdogan is as a political operator! I’m not a fan of his (for many reasons), but you’ve got to admire the guy’s handling of this incident to put pressure on a country that has far more clout than his. Again, as I’ve said before, I think that Turkey is going to be the biggest beneficiary of this whole sorry saga as Erdogan will surely use this as a way to get concessions from all sides whilst at the same time clipping the wings (at least for the short term) of a major regional power.

US and UK manufacturing hit respective hurdles, Dyson goes to Singapore and Tesla gets a double boost…

In US manufacturers see signs of new risks (Wall Street Journal, Austen Hufford and Doug Cameron) we see that industrial shares are experiencing a sell-off at the moment as both Caterpillar and 3M highlighted rising costs, a stronger dollar and increasing concerns over the US-China trade war as being factors hitting their third quarter results. This follows after a year of strong production and sales that have been driven by Trump’s tax cuts and rising consumer confidence. * SO WHAT? * The news from these industrial giants doesn’t make for comfortable reading for the moment, but if/when a US-China deal gets struck I would have thought manufacturing will get a huge uplift in a relief rally – although I’d expect some big losers to emerge once the dust has settled as I find it hard to believe that EVERYONE will benefit given that both sides are going to have to make some compromises. Until that happens I expect that more manufacturers will unveil increasingly downbeat forecasts.

UK manufacturing orders fall at fastest pace since 2015 on Brexit fears (Financial Times, Gavin Jackson) continues the gloomy mood as a survey published by the CBI business group shows that new UK manufacturing orders for the third quarter have fallen at their fastest rate for three years on wobbles over Brexit. Export order volumes fell even faster, with levels reaching their lowest in the same time period. In a statement-of-the-bleedin’-obvious, CBI chief economist Rain Newton-Smith said that “Aside from much-needed progress on domestic policy, the government’s number one priority on Brexit must be securing the withdrawal agreement, ushering in a much-needed transition period that will give businesses the breathing space they need”. No sh!t. Funnily enough, confidence continues to fall. * SO WHAT? * If US manufacturing’s major stumbling block is the US-China trade/tariff war, UK manufacturing’s Achilles heel is Brexit, simplistically speaking. TBH, of the two, I think that the US’s problem can be solved way more easily (and have a much more immediate effect) than the UK’s as no one has got any idea how Brexit’s going to turn out as things stand. Even if a palatable deal emerges on the Brexit front, I would have thought that the effects will take quite a while to come through given that nothing like this has ever happened before so all parties may not jump in wholeheartedly from the off. On the other hand, if Trump rolls back certain tariffs and gets some other agreements in place I would have thought that manufacturing (and the markets, for that matter) will react very quickly. The newsflow in Brexit is all over the place at the moment and 

until we get ANY kind of clarity, manufacturing is going to go further into the doldrums at least until we hit the transition deadline.

Dyson parks electric car plant in Singapore (The Times, Robert Lea) is a story doing the rounds today across the broadsheets as Sir James Dyson announced that his new electric vehicle would be manufactured in a car plant in Singapore rather than one in the UK. Dyson said that he chose Singapore because its where his company already makes millions of motors, it has an existing supply chain, access to a well-educated and highly-skilled workforce and is closer to what will arguably be the electric car’s biggest global market – China. Spare us the hot air over Dyson’s move to Singapore (Daily Telegraph, Christopher Williams) goes further and points out the additional practical attractions of Singapore’s pioneer certificate incentive, which sets the corporate tax rate to only 5% for companies “prepared to make significant investments in contribution to the economy or in advancement of capabilities towards globally leading industries” and the country’s existing trade deals with China, India, Japan AND, as of last week, the EU, which means that distribution will not suffer disruption by Brexit. Given that Dyson is targeting 2021 for the company’s first vehicle to hit the road, minimising the risk of delay is very important. * SO WHAT? * Given that Sir James was a highly vocal proponent of Brexit, the irony of him shunning the country he said should be “a powerful manufacturing nation making wonderful products and stop being in awe of the Japanese and Germans who are not better than us” is not lost! Still, we will have to wait a while until we see whether he was right to make the move or not. At the end of the day, he’s got to do what he feels is right for his company’s future.

Talking about electric cars, Tesla gets a lift as critic changes tune (The Times, Tom Knowles) highlights the major U-turn by a formerly fierce critic, Citron Research’s Andrew Left, who is now coming out in support of Tesla saying that it “appears to be the only company that can produce and sell electric cars” and Tesla shares soar on anticipation of third-quarter results (Wall Street Journal, Tim Higgins) shows that the company’s shares jumped by almost 13% as it said that it was bringing forward its third quarter results to after the market close today. Given that Elon Musk has promised a net profit and positive cash flow for the upcoming results, the fact of his bringing the results forward is making investors salivate in anticipation of some really good news. As Morgan Stanley analyst Adam Jonas put it in a note yesterday, “Game theory suggests the early/surprise reporting is good news…Tesla is at the most critical point in the ramp of its most important product (model 3) and is arguably at the most critical point of its liquidity/access to capital since it has been a public company. Why would Tesla pull forward the introduction of adverse news into the market now?”. Sounds like there’s good news a-comin’!

And finally, in other news…

There was a story out on the weekend of a fun-sounding race in Hundreds of waiters try not to spill any drinks in street race (Metro, Jen Mills https://tinyurl.com/ycz2wny3) but if you want something more sedentary (but actually far more frustrating), maybe you should have a go at the noodle version of “Where’s Wally” in Can you clear this impossible mini-game on Baby Star Ramen’s website? (SoraNews24, Krista Rogers https://tinyurl.com/y8zbekh3). Grrrrr.