Watson’s Weekly 21-09-2024

This is an amalgamation of the “best bits” of the daily weekday newsletter/blog woven together to form a concise and coherent view on the things that matter in the commercial and economic news of the week. 

THE COLOURED HIGHLIGHT REFERS TO THE EDITION WHERE THE STORY APPEARED IN WATSON’S DAILY. Clicking on the day will take you to the appropriate edition of Watson’s Daily.

This was the week of exploding pagers, another Trump assassination attempt and automotive strife…

• IN WAR NEWS – Israel launched an attack on Hizbollah via exploding pagers. This shocked everyone around the world, caused chaos and makes it more likely that other countries will get involved in the Middle East conflict. Clearly there is huge human cost here but in terms of “commercial” impact, it is likely to keep freight rates higher for longer and I suspect that security will have to get tighter at airports etc. because if this tech has gone under the radar of Hezbollah, it’s conceivable that terrorists could use it on commercial flights, for instance.
• IN US NEWS – Donald Trump survived another (less effective) assassination attempt and speculation built up ahead of the Fed meeting on Wednesday about whether they’d go for a 0.25 percentage point cut or a 0.50 percentage point one. In the end, the Fed cut them by 0.50 percentage points and this sent the S&P to a record high. Re other pre-presidential election developments, Trump launched a crypto company called World Liberty Financial that would “leave slow and outdated big banks behind”, various celebs got behind their preferred candidates (but it doesn’t actually make much of a difference) and the decision on whether the Nippon Steel acquisition of US Steel should go ahead has been delayed until after the election.
• IN CHINA – Taiwan’s defence minister is getting concerned about the increase in Chinese military activity but also the prospect of Trump becoming President as it looks likely that he might withdraw military support (or at least de-prioritise it) if gets back to the White House.
• IN JAPAN – the Bank of Japan decided to leave interest rates unchanged at 0.25% (but that was widely expected)
• IN THE UK – the Bank of England left interest rates unchanged at 5% as there are still lingering concerns about lower rates potentially stoking inflation.

IN COMMODITIES NEWS…

• Coffee prices look set to rise because of poor harvests in Brazil (drought) and Vietnam (typhoon) but also because farmers are switching to growing durian (a very smelly fruit by all accounts!) as its popularity is growing – and it’s more profitable than growing coffee!
• BHP said that rapid growth in AI will hit copper supplies in the coming years as demand for copper for data centres will boom significantly. At the moment, they are weak because of sluggish demand from China and over-production.

IN BUSINESS TRENDS…

• IN CHINA-RELATED TRENDS – PwC has halted work on its $140m Hainan campus as part of a strategic review but I guess it has to question its commitment to China going forward given the increasingly hostile business environment. Meanwhile, Mercedes-Benz sold out of its luxury Chinese EV JV to BYD, its partner since 2010. BYD has reiterated its commitment to the brand, Denza.
• Brexit has hit trade in the UK (yes, it’s an academic report that tells us what we already know). TBF, this does put some figures on the impact but I think this is just another thing to consider as the UK tries to “normalise” the relationship with Europe.
• Almost half of the UK’s biggest law firms posted record double-digit revenue rises over 2023 in the industry’s best performance since before the 2008 crisis. When M&A kicks in properly I would have thought this will improve even more!

IN CONSUMER TRENDS…

• US consumer spending actually came in above analyst expectations for August despite an apparent slowing down in the jobs market.
• Italy continues to attract rich Europeans trying to flee higher tax regimes despite doubling its flat tax on the foreign income of rich expats to €200,000 a year in August from €100,000. The new rate only applies to newcomers who established tax residency in Italy after the change was approved while existing participants will still be on the old rate.
• UK consumer confidence has cratered according to the latest GfK Consumer Confidence index which shows that consumer confidence dipped sharply in September, negating all the positive momentum gained this year as people worry about what they’re going to be in for in the forthcoming “painful” Budget.

IN EMPLOYMENT TRENDS…

• Amazon ordered workers to return to the office (RTO) for five days a week from early next year. Staff have had to be in the office at least three days a week since May 1st 2023. Unsurprisingly, this has gone down like a lead balloon with staff but has been regarded with interest by companies at other firms and it represents a major shift in the tech industry that has largely embraced hybrid working.
• UK bosses reckon there will be full RTO within three years, according to a study by KPMG. They have also managed to get a concession from the government (thus far) to retain the right to put new hires on 6-month probation and it sounds like employers are increasingly de-prioritising workplace diversity.
• There was a lot of talk about employee welfare this week. The Mindful Business Charter, a mental health charity, is urging law firms to monitor the sleeping patterns of employees who might be struggling with their mental health but I wonder whether this will actually make things even more stressful. JP Morgan appointed a banker to oversee juniors’ wellbeing as concerns continue to rise about working conditions on Wall Street. Meanwhile, Deloitte announced that it would offer equal parental leave in an effort to help more women climb up the corporate ladder. From the beginning of next year, new fathers and mothers will get 26 weeks of fully paid leave. I think this is great – for big firms that have decent-sized teams that can cope with this – but I think it could be a nightmare for SMEs who won’t be able to cope with such long absences.

• Power shortages could scupper the government’s plans to build a load of data centres as the grid currently can’t cope. The West London cluster , which has the biggest concentration of data centres outside the US, is at full capacity and cannot connect any more sites. New capacity is going to take a few years to come online and fourteen data centre projects have been put on hold until extra capacity is added.
• BP is selling its US onshore wind energy division, BP Wind Energy, in its push to streamline the business and focus on its solar operation, Lightsource BP.
• Rolls-Royce won a bid to build SMRs in the Czech Republic, its first order from a European government. Details are being negotiated, but this should be good news for its ongoing bid to get an order from the UK government.
• One of Europe’s biggest solar panel manufacturers, Meyer Burger, is looking to cut headcount by 20% in order to return to profitability but the future looks bleak for a company that is finding it increasingly difficult to compete with Chinese manufacturers.

IN BATTERY NEWS…

• European EV battery maker Northvolt is fighting for survival but the Swedish government continues to refuse to bail it out by taking a stake. If Northvolt dies, this will become yet another industry that China will win.

IN EV NEWS…

• Italian PM Meloni backed European carmakers who are concerned about the massive emissions fines they’ll have to pay from next year despite EV sales cratering in Europe. The situation is no better in the UK as used EV prices are plummeting due to lack of demand and oversupply from fleet buyers flooding the market while pressure is building on the government to rein in its pre-election promise of reinstating the 2030 petrol car deadline.

IN INDIVIDUAL CAR COMPANY NEWS…

• Mercedes-Benz cut its full-year forecasts, blaming deterioration in the global macro environment.
• VW is considering cutting 30,000 jobs in order to save money. This follows on from recent talk of factory closures and shows just how dire VW’s situation has become.

• IN CHIPS NEWS – Intel announced cost-cutting plans to jolt the chipmaker out of its current rut but then it announced a deal with Amazon’s AWS to build custom-made AI chips for it, which should be a nice little earner. Microsoft asked for more clarity about the AI chip supply restrictions to the Middle East, something that’s particularly sensitive for Microsoft given its increasing links to the region.
• IN SOCIAL MEDIA NEWS – Meta is facing a massive EU antitrust fine for alleged anti-competitive practices in its free Facebook Marketplace services. A decision on this is due next month. Meanwhile, it announced measures to let parents see who their kids are messaging as part of a broad raft of incoming safety changes that will be introduced to combat concerns over online grooming and sextortion. Snap announced that it was developing some new AR glasses, but TBH they look ridiculous, are very heavy and probably cost loads as the company was very cagey about how much the R&D bill was. Brazil fined X for its “wilful, illegal and persistent” efforts to get around the ban that was recently imposed in the country. Musk said it was inadvertent but judge Moraes said it was deliberate. The drama continues…
• IN MEDIA NEWS – Warner Music announced that it would be cutting 13% of staff as opposed to the 10% it had previously identified as it tries to free up more money to invest in music. Elsewhere, S4 Capital saw its share price hit an all-time low as it reported a sharp drop in revenues for the half year. Ad spend is often seen as a leading economic indicator but I would suggest that, in this case, many advertisers could be holding back ahead of the US presidential election.

• IN RETAIL TRENDS – dollar stores in the US continue to expand their footprint despite increasing competition from online retailers like Temu. In the UK, London retailers continue to appeal to the government to bring back UK tax-free shopping for tourists because they are losing revenues.
• IN INDIVIDUAL COMPANY NEWS – Next warned of store closures after it lost a court case on equal pay but it sounded bullish about overseas opportunities. AllSaints reported another record year of revenues and profits in its 30th year of operation and Shein faces increased political scrutiny ahead of a planned London IPO. In grocery retail, Asda’s co-owner Mohsin Issa stepped back and will be replaced by current chairman Lord Stuart Rose and an exec at TDR (until they find a suitable CEO) for the day-to-day, Tesco is mooting the idea of using AI to “help” customers make healthier choices in their shopping (although I really don’t think this sounds like a good idea) and Ocado raised its sales outlook for the year as it gained more customers. Elsewhere, B&Q’s owner, Kingfisher, reported weak sales of kitchens and bathrooms in the UK but said that there were signs of recovery.

IN LEISURE NEWS…

• Pret a Manger’s sales broke the £1bn barrier thanks to its global expansion. 25% of its sales are now outside the UK and it has made impressive gains in the US in particular. I’m quite sceptical about its fortunes given that there are pretty low barriers to entry to this business and alternatives abound. Maybe it can see growth if it seeks to build up more of a presence in railway stations and airports, a tactic that is going very well for Boots!

• IN FINANCIALS – JP Morgan looks like it’s going to take over Apple’s credit card business from Goldman Sachs (GS is getting out of this area) and Revolut announced a 2025 India launch in its latest efforts to diversify its revenues outside Europe. In investment trends, BlackRock and Microsoft announced a $30bn fund to invest in AI infrastructure and it was interesting to see that India has now overtaken China in allocation for the MSCI All-Country World Index, a common stock market benchmark. This is a indicator of India’s relatively positive momentum versus China’s economic sluggishness.
• IN REAL ESTATE NEWS – the Earls Court Development Company (ECDC) has now formally submitted plans to develop the more than 40-acre site in a first phase that is due to complete by 2030 as well as subsequent stages that will run into the 2040s and Mayor Sadiq Khan submitted plans for Oxford Street to be pedestrianised. His plans had been rejected before but the new government may look on them more favourably. In residential property news, Rightmove stats show that asking prices for UK homes are rising and ONS data shows that house prices in London underperformed the rest of the UK in July. In the rental market, research from Hamptons shows that average rents in the north and the south of the country are converging while rents overall are soaring due to lack of supply and ongoing demand.
• IN INDIVIDUAL COMPANY NEWS – Boeing has decided to freeze hiring as it reacts to strikes, Philip Morris has decided to sell inhaler maker Vectura for £150m just three years after it bought it for £1bn as it just never got traction and Roche had disappointing data from its weight-loss drug-in-development as it had high rates of vomiting as one of the side effects. Elsewhere, British merchant bank Close Brothers is going to sell its wealth business for £200m to raise funds in anticipation of a possible fine that might result from the current FCA investigation into alleged mis-selling. Some say this could be the next PPI. In the US, FedEx cut its full-year outlook due to weaker-than-expected demand and Nike’s CEO stepped down to be replaced by a Nike returner, presumably paying the price for Nike’s poor performance over the last few years.

My favourite “AND FINALLY” video this week was of the turtle on a skateboard! But of course!