In this week’s Commercial Awareness update we discuss a bad week for global markets, Patisserie Valerie, Apple’s new acquisition, why profits are up for American banks and the new £50 note.
It was a rocky week for the FTSE 100, as global markets continued to fall. On Thursday alone the UK’s most prominent stock exchange fell 2% as a knock on effect from falls across America and Asia. On Wall Street, the S&P 500 dropped 5.5% in the preceding six days, but it was the markets in Asia which were hit worst. The Japanese Nikkei fell 4% on Thursday alone. The major worry is that the trade dispute between America and China is starting to hit profits, especially in the technology sector - shares in Apple were down 4.6%.
President Trump, earlier in the week, was critical of how quickly the Federal Reserve (the Fed) was raising interest rates, suggesting that was the reason for the stock market decline over the past week. If interest rates are higher and bond yields are strong, investors are more likely to save their money, rather than seek bigger returns. However, as inflation is at 2.3% in the US and with the current economic data, most commentators believe it is the right time to raise rates. If more people are saving money because of better rates, rather than spending, it is likely to ease inflation.
In China, the central bank has freed up £108 billion to encourage investment and economic growth. They are doing this by reducing the amount banks have to hold on reserve by 1%. They currently have to hold 15.5% of deposits if they are a large bank and 13.5% for small lenders. Now they are required to hold less, the government hopes the money will be loaned to businesses and individuals, meaning there is more money in the economy to stimulate growth. The markets in Shanghai are down 15% since the start of the year and there are widespread concerns over trade.
The stock market in Saudi Arabia tumbled last week as fears grew that they may face sanctions over the disappearance of journalist Jamal Khashoggi. The former government advisor, who had been critical of the government, has not been seen since he visited the Saudi consulate in Istanbul. Stocks have dropped more than 9% since Khashoggi disappeared almost two weeks ago, with global officials calling for an investigation and leading investors pulling funds out of the Kingdom.
Companies to Watch
The cafe chain Patisserie Valerie is on the verge of collapse as boss Luke Johnson provides a £20 million package as part of a rescue plan. Earlier in the week, the board had discovered a ‘secret’ overdraft, which they previously didn’t realise they had, totaling £9.7 million. The HMRC has also issued a wind-up petition against one of Patisserie Valerie’s main subsidiary’s, Stonebeach over an unpaid tax bill of £1.1 million. Only three months ago the company announced that profits for the first half of the year were up
The big American banks are announcing their Q3 results and it has been a generally positive period for the industry. CitiGroup comfortably beat analysts’ expectations by generating a net income of $4.6 billion in the quarter - $0.5 billion above expectations. Despite revenue being a shade below what was expected ($18.4 billion), Citigroup was able to increase profits by improving efficiency and increasing their net interest margin (the difference between the interest rate the bank charges on their loans and the rate they pay out to customers who bank with them). However, the biggest change to profit levels was due to the amount of tax they paid - down $400 million thanks to Trump’s policy reform just after he came into office. In recent months shares in big banks in America have taken a downturn, so these results came as welcome news - shares in Citi were up close to 3% on the announcement.
Apple makes a further step in their plan to build more efficient chips for their products by agreeing to a £454 million deal to bring in-house Anglo-German chipmaker Dialog Semiconductor. The power management technology will be licensed to Apple and 300 people who work for the company will now join the Apple team. In recent years, the chipmaker has been working with Apple more closely and some were worried they were too reliant on the tech giant for their business - it stands at approximately 75% of their revenue - especially when there were rumours Apple were aiming to be less reliant on their external supply chain. Now Apple has committed £227 million to its technology and a further £227 million for all its future products for three years concerns have been alleviated. The deal is expected to be completed in the first half of 2019 as long as they get regulatory approval. Many believe that Apple could launch a new VR product around the same time.
£50 bank notes
It has been announced that the £50 bank note will not be scrapped, despite speculation the Treasury was about to remove the denomination from circulation. Instead, they will be getting a plastic redesign, similar to the £10 and £20 note - this will make them more durable and more difficult to counterfeit. Large notes have an association with tax evasion, money laundering and other criminal activity - the European Central Bank started phasing out the €500 note in 2016 as they were used commonly to finance crime. Also, the higher the denomination, the more profit that can be made by creating counterfeit notes - as £50 notes are less common (there are 330 million in circulation out of 3.6 billion total notes), the theory is that people are less likely to spot a fake note compared to the real ones too.
We’re delighted to be partnered with Hogan Lovells for the Commercial Awareness updates in October. They are a top global law firm combining a unique balance of ambition and approachability with over 2,500 lawyers working in over 47 offices. They deliver practical solutions to prestigious clients and have a dynamic working culture where the ambition of their trainee solicitors is supported to ensure their success.