In this week’s Commercial Awareness update, we discuss whether a post-Brexit financial services deal has been done, US sanctions on Iran, Jaguar Land Rover’s turnaround plan and Uber groundbreaking court case.
Deal over financial services?
It was a very up and down week for the pound, as speculation over Brexit caused highs and lows. This was an excellent example of how confidence can shift quickly and significantly impact the markets. So what happened? On Tuesday, ratings agency Standard & Poor suggested that the risk of leaving the EU without a trade deal was increasing and by extension, the chances of a recession were rising. This news caused sterling to drop 0.7% against the dollar, as if there’s a lack of confidence in the future prosperity of a country, this is often reflected in investors selling off their currency.
Conversely, when there is good news the value of currency jumps - on Thursday The Times reported that the EU and the UK had provisionally agreed a post-Brexit deal for the financial services sector, which would protect the City of London from disruption after Brexit. The markets also reacted positively to the Bank of England’s quarterly inflation report, which hinted at quicker than expected interest rate rises. With a Brexit deal and a smooth transition, the forecast suggests that interest rates could rise to 1.5% in three years. If interest rates rise, banks and financial firms will be able to make more profits from the money they lend; hence why the markets tend to react positively to them. With this news and the potential for a post-Brexit deal in financial services, the pound jumped 1% against the dollar to $1.29.
Since then, the government has denied the deal has been done over Britain’s services after Britain leaves the EU. It’s an essential story to follow over the next week or two.
US sanctions on Iran
Starting today, US President Donald Trump has reinstated sanctions on Iran which were removed in 2015 by the nuclear deal. Said to be the toughest sanctions ever on Iran, America will punish companies and countries that continue to trade with the nation. Three years ago, five nations agreed to remove barriers to trading with Iran in exchange for the latter curtailing their nuclear activities. America has reinstated sanctions despite opposition from Germany, France and the UK, as they aim to stop what they call “malign activities”, including cyber attacks and missile tests.
The US sanctions are likely to hit a broad range of Iranian sectors, as American companies have pulled activity out of the country. The impact will be significant to both Iran itself and the wider global economy. They are one of the world’s largest oil producers and this industry is worth billions of dollars to their economy each year, however, we are already starting to see decline in their oil output since talk around these sanctions began.
Furthermore, the company that provides the network for making international payments, Swift is expected to cut off Iranian businesses, limiting their access to international finance. America has said that eight countries are exempt from the sanctions and can continue to import a limited amount of oil from Iran. The UK, France and Germany has committed to helping businesses continue doing legitimate business with Iran; protecting them from US sanctions. However, given the power of America and its influence, this is unlike to offer much support for the Iranian economy.
Companies to watch
Jaguar Land Rover
The UK’s biggest car manufacturer, Jaguar Land Rover announced a £2.5 billion turnaround programme after they made a pre-tax loss of £90 million last quarter. Sales volume fell by 13% in the July to September quarter compared the same period in 2017. The biggest worry is that sales in China were down following changes to import duty and trade tensions with the US. Also, many of their cars are diesel which are facing a backlash for environmental reasons which is likely to have an impact on demand. Furthermore, there’s a new European emissions standards known as WLTP, which increases production time. They have struggled to adapt to the new electric and hybrid car model, which other car manufacturers have taken the initiative on.
The new turnaround plan is hoping to cut costs, including reducing annual spending by £500 million this year. They have already cut back production at two plants and are likely to make redundancies.
Ride-hailing firm, Uber is back in court ahead of a groundbreaking ruling surrounding the status of their workers. Two years ago, two Uber drivers brought forward a case demanding that Uber drivers be classified as employees, rather than as self-employed, and won. This would mean that their drivers would be entitled to a guaranteed minimum wage, holiday pay and other rights, causing problems for Uber’s business model. Uber is challenging the ruling in the High Courts, claiming their business is just connecting customers and independent drivers. However, many believe the restrictions they have for their workers mean they should be qualified as employees.
This is a huge ruling for Uber, but also the whole of the ‘gig’ economy, which relies on workers doing flexible hours. If the ruling is upheld, a number of businesses may have to rethink their business models.
Social media giant Facebook announced a boost in their profits despite a tough few months for the company. Net income in the third quarter rose to $5.14 billion ($1.76 per share), compared to Wall Street’s expectations of $1.46 per shares. However, revenue and user growth did just miss expectations. Shares dropped by 5% on the announcement, but recovered to finish down 2.9% on the day. More than 2 billion people use Facebook’s services, including Instagram and Whatsapp, on a daily basis, something CEO Mark Zuckerberg highlighted to investors after the results were announced. There are worries that Facebook’s engagement has flatlined, but with innovations in the video space and new develops, there’s lots more to come from the tech giant.
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