In this week’s Commercial Awareness update, we discuss oil prices rising, China’s tariff fightback, Michael Kors acquiring Versace, Musk’s $20 million fine, Thomas Cook’s summer woes and whether Amazon could be split into two.
OPEC predicts oil price surge
Last week the oil price hit a four year high, as the price of a barrel of brent crude rose above $80. Sanctions against Iran, which will start to hit their oil sector in November, and figures that suggest there is an oil production slowdown in America are key reasons for this latest price hike. The markets are bracing themselves for further rises and many believe the oil price could rise above $100 per barrel in the near future. The Organisation of the Petroleum Exporting Countries (OPEC), who control a vast majority of the supply of oil, has said it would not increase production - by increasing supply, the price would naturally drop as it would outweigh demand.
US President, Donald Trump called for this increase in supply to control prices, but this was rejected by both Saudi Arabia and Russia. In 2016, Opec agreed to control supply when oil crashed to just above $40 per barrel - these controls look set to continue. Even though demand for oil is high at the moment, there could be longer-term implications on demand for oil as electric cars and other forms of energy become more prominent.
China’s tariff fightback
America and China edge closer to full blown trade war after the latter responded to further American tariff by announcing retaliatory measures. It started with America announcing it would impose tariffs on $200 billion worth of Chinese goods (it’s third tariff announcement about Chinese goods in quick succession), which will start at 10% and rise to 25% at the start of 2019. China responded with tax hikes on US exports, including coffee and honey.
Some companies in the US have expressed their worries about these tariffs, citing higher costs for their business and therefore risks of job losses as their major concerns. Trump has threatened to add tariffs to a further $267 billion worth of goods from China, which would mean almost everything China sells in the US would be affected. The American President is concerned about the US trade deficit and what he believes are unfair trade practices by other countries.
In other financial news in America, the US Federal Reserve (the Fed) raises interest rates last week for the third time in 2018. They have also suggested that a further hike could be likely in December. It wasn’t a surprise to investors as the benchmark was increased from 2% to 2.25%. Most data points towards the US economy doing well, which could lead to higher inflation - if confidence is high, consumers are more likely to spend more (increasing demand and therefore prices). By raising interest rates, consumers are likely to save as they will receive a bigger return from government bonds and other saving options.
Companies to watch
Citi Research has said that Amazon should split into two separate entities to minimise the risk of increasing regulatory pressures. There is the belief they will start getting more antitrust (a set of regulations aimed at promoting fair competition) scrutiny from the Trump government now they have a $1 trillion valuation. If they were to become two companies, commentators believe it could increase the combined value of Amazon and shareholder value; but the lower market capitalisation of each separately could quell attention about a lack of market competition. Analysis from Citi Research estimates that if they were to split the retail business would be worth $400 billion, while their more profitable web services business would be worth $600 billion.
The luxury fashion retailer Michael Kors has announced it is to acquire Versace for $2 billion, giving the American retailer a stronghold in Europe’s high-end fashion market. Michael Kors has said it aims to boost Versace’s revenue to $2 billion and grow the number of stores from 200 to 300. After the deal is finalised Michael Kors will trade under the changed name of Capri Holdings.
Many fans of Versace have expressed concern that by selling to Michael Kors the company will start to lose its prestigious identity. Versace’s products cost significantly more than products from Michael Kors - could the latter be tempted to lower the price point of Versace items to reach new markets?
Last week, Tesla’s Elon Musk agreed to step down as chairman and pay a $20 million fine to the Securities and Exchange Commission (SEC) over his Tweets about taking Tesla private. SEC had brought charges against the CEO claiming he had misled investors, when he claimed he was reaching a deal to take Tesla private with a valuation of $420 per share. The settlement reached between the two parties will still allow Musk to be CEO. The feeling is that if they had removed him as CEO, Tesla’s share price would drop, harming the investors the SEC is aiming to protect. Despite the settlement it is still unclear whether the Department of Justice will pursue criminal charges.
Commentators expect the share price to bounce back today on the news of this settlement. There had been some previous criticism of the entrepreneur, who is also being sued by a British diver who supported the Thai cave rescue after his comments on Twitter.
The holiday company Thomas Cook issued a profit warning last week, after they suggest the hot summer meant fewer Brits headed overseas this summer. They now expect their annual operating profits to be around £280 million, down from the £323 million they had forecasted. The company suggested they had to heavily discount last-minute break deals because fewer consumers were going away during the hot summer. As a result of the news, Thomas Cook’s share price dropped 20% and their share rating was downgraded.
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