Watson’s Weekly 18-02-2023

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.

The balloon drama continues, AI chatbots get frisky and the FCA closes in on BNPL…

• IN THE US – inflation eased for the seventh month in a row, showing that the interest rate hikes are working. There’s still a risk, though, that the tight labour market will squeeze wages  higher, which will result in more spending that will then result in higher inflation. There was a lot of posturing about the spy/errant weather balloons (depending on whether you are American or Chinese 🤣) this week with Biden saying he wanted to talk to Xi to “get to the bottom” of it all while China imposed some token sanctions against Lockhead Martin and a division of Raytheon Technologies (token because they can’t really make military sales to China anyway!). Taiwan said it often had balloons flying into its airspace, prompting rising concerns about an invasion from China, which in turn prompted a visit by the US deputy assistant secretary of defence to Taiwan. This is only the second time that such a high-up Pentagon official has visited Taiwan in 40 years! Apart from kiddie birthday parties, who knew balloons could cause such excitement?!?
• IN THE UK – we managed to avoid recession by the skin of our teeth as real GDP “grew” by 0.01%. The UK’s economy has recovered to the extent that the Bank of England withdrew its prediction of a recession and UK inflation fell to a five-month low, thanks largely to weaker fuel prices. BoE’s chief economist, Huw Pill, hinted that rate rises would be in smaller increments and the FTSE broker the 8,000 level, which feels a bit wrong considering that we’re in a cost-of-living crisis, a war is going on and there are a lot of uncertainties between the US, Europe and China at the moment. Nicola Sturgeon resigned after a sustained period of pressure, leaving everyone to wonder who would be taking the hot seat.
• IN TURKEY – the aftermath of the terrible earthquake continued and President Erdoğan faced a lot of criticism for allowing shoddy building standards. He needs to do a good job of responding to this disaster to have any chance of being re-elected.

IN CRYPTO NEWS…

Binance had its worst day since December as it suffered a massive $830m wave of withdrawals as confidence in crypto got hit badly while the SEC is now suing stablecoin operator Terraform and chief Do Kwon for making misleading statements to sell their digital assets to would-be investors.

IN ENERGY NEWS…

• There’s a right old bun fight going on between companies like BP, NextEra Energy, Vestas Wind Systems and Intersect Power to qualify for tax credits for hydrogen in the US. Qualifying will be key to making clean hydrogen cost effective when making hydrogen from natural gas. The IRS and Treasury are to finalise the rules in the coming months. Brokers and lawyers are seeing a rush of interest in ways to trade the tax credits in the open market while, over in Europe, France and Germany are also fighting over what constitutes “green” hydrogen as Europe tries to cut carbon emissions. Nuclear power achieved “green” status in the UK which will give the industry access to billions of pounds for funding.
• Centrica more than tripled its profits and announced a chunky dividend and share buyback programme as it did particularly well from its oil, gas and nuclear trading business.
• It looks likely that big US oil producers in particular will use the massive amounts of cash they earned last year to go shopping and boost M&A volumes by buying smaller rivals so they get access to the best drilling sites.

IN BUSINESS TRENDS NEWS…

• Big corporates like Apple, Pfizer, Mercedes-Benz and VW are among those trying to keep China sweet despite ongoing US-China tensions because they still want to do business there. They have to hold back a bit, though, until there’s a bit more clarification on US-China policy.
• In the UK, business pessimism persists – according to the BDO business optimism index – thanks to a drop in output and consumer confidence amid rising borrowing costs, possibility of recession and booming inflation (although I wonder whether that’ll change now that “official” forecasts of recession have diminished and the rate of inflation growth is slowing down). Meanwhile, pub closures in 2022 were at their highest level for the last yen years. It’s not that surprising given the issues they have been facing with rising energy, labour, food and drink costs. OK, so the government has extended its energy support package but it’s not as generous as the existing one.

IN AI NEWS…

• Universal Music Group, the world’s biggest record label, warned about the rise of AI-created music and is particularly concerned about how to monetise the music used to “train” generators like ChatGPT.

IN CHINA…

• Property brokers are getting nervous as buyers aren’t rushing in despite the government relaxing leverage limits after a prolonged crackdown. It might take a bit of time for things to normalise. Also, you would have thought that consumers will need to see property prices rise again to inject a bit of FOMO into the proceedings…

IN THE UK…

• IN RESIDENTIAL PROPERTY – Demand for new builds is rising, according to the likes of Redrow and Bellway, UK house prices are levelling out and mortgage rates are calming down. House prices may not bounce back as quickly as they have done in previous downturns and Barratt Developments is cautious about the rest of 2023, but will need to see how spring goes to get better visibility. The number of millennials and Gen-Zs living with their parents is at record levels as, presumably, they are all trying to scrape together a deposit, something that is very difficult if you are facing booming rents! Rental evictions in England and Wales have almost doubled in a year, but it’s unclear as to whether this trend will continue.

• Credit Suisse had a shocker, announcing its worst full-year loss since 2008 – and it cancelled the annual bonus for its top execs. This was due to rapid fund withdrawals from their wealth management, asset management and investment management divisions.
• Rothschild said it wants to take the investment bank private, interesting because most banks want to do the opposite!
• Finance sector jobs vacancies increased in the UK, so it’ll be interesting to see how long the momentum lasts.
• The City of London has started a review of financial services regulations in the UK to make it more competitive and attractive. Let’s see how that goes!
• It was interesting to see how US BNPL provider, Affirm, is trying to adjust to making profit (or minimising losses) in a rising interest rate environment. When interest rates were low, this was pretty easy, but now they are moving – and in the upward direction – they are finding it more difficult.

• Adidas had celebrity problems as it reported weak sales. Beyonce’s clothing line isn’t selling well and it has a ton of Kanye West’s Yeezy trainers that it needs to sell.
• The Adani Group continues to pose problems (as mentioned above) and the MSCI decided to cut weightings in its indices to better reflect the actual free float. All this meant that there was a lot of technical selling in addition to the “normal” selling due to the recent damning report from Hindenburg Research.
• Disney announced 7,000 job cuts and $5.5bn in cost reductions as new/old CEO Bob Iger performs open heart surgery on the company to get back on the growth track again.
• Mattel’s earnings fell in Q4 due to the hostile economic environment. It has inventory to get rid of – but it’s not the only one having problems! Rival Hasbro is also experiencing the same thing.

• Watson’s Yearly 2022/23: coming shortly…

My favourite “alternative” story this week was the Mini Eggs game-changer in People discover ‘life-changing’ way of eating Mini Eggs and ‘won’t turn back’ (The Mirror, Ariane Sohrabi-Shiraz). I haven’t tried this yet but I am DEFINITELY going to!