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In this week’s Commercial Awareness update, we discuss oil prices after the Saudi Arabia oil facility attacks, Europe’s negative interest rates, a bid for the London Stock Exchange, WeWork’s IPO delay and Aldi’s expansion.
Oil prices surge
Oil prices surged last week after an attack on Saudi Arabia’s Abqaiq oil facility cut output and shook the markets. The drone attack cut off half of the supply from Saudi Arabia - 5.7 million barrels a day - which is 5% of the world’s supply. On the news, the price of Brent crude oil shot up 20%, making it the biggest rise since Iraq invaded Kuwait in 1990. The worry is that the plant will be well below its maximum capacity for weeks, if not months - if supply is lower, but demand stays the same, prices will rise. The markets react to the event as they speculate the future impact of oil supply, and Brent hit $71 a barrel (after the 20% jump). Since then the markets have calmed slightly as the events unfolded and has now dipped back to $64 a barrel.
Saudi Arabia is the second largest oil producing country (after the US), so having cut output is going to have a global impact, but it could be the aftermath of the attack which has greater impact on global markets and oil prices. Iran has been accused by America of carrying out the attack and has threatened some form of retaliation if there is evidence to prove this, especially in the way of economic sanctions.
Questions to ask yourself... Does a cut supply from Saudi Arabia benefit the USA? Why did the markets react so strongly to this?
Eurozone’s negative interest rates
The European Central Bank (ECB) cut interest rates once again last week, as they continue having a negative baseline interest rate. The cut saw a base rate of 0.5%, the lowest it has ever been in the region. Negative interest rates are imposed to stimulate the economy and get money flowing in the system - if it costs to hold money with the central bank, banks are more likely to lend and also encourage them to cut their own interest rates to do so. The ECB has also announced it will restart quantitative easing across Europe, again to drive money into the economy. They will be buying $22 billion worth of government and company bonds each month, starting in November.
These measures have been taken after economic data shows that GDP isn’t growing as much as previously forecasted and inflation is not set to hit its target of 2%. If more money is driven into the economy and it’s cheaper to borrow, there’s likely to be more spending and therefore inflation is likely to rise. Not everyone is behind the ECB’s plan and many commentators think they have gone too far. Banks across Europe are particularly frustrated, as lower interest rates means they cannot make as much money when they lend. There’s about to be a new president of the ECB, so it will be interesting to see what happens when the new leadership takes over.
Questions to ask yourself... What are the other downsides of negative interest rates? Why is very low inflation a bad thing for an economy?
Companies to watch
London Stock Exchange Group
Hong Kong Exchanges and Clearing (HKEX) last week made a surprise £32 billion bid to takeover the London Stock Exchange Group (LSE). LSEG is a 321-year-old institution that runs the stock exchange, the FTSE, in London. HKEX offered a package worth £32 billion and a 41% stake in the would-be created new business. The offer represented a 23% premium on the share price of the LSE. However, this didn’t interest the markets that much, as the LSE share price jumped only 5% on the day this was announced - you would expect a bigger increase given the size of the offer. It shows that speculators believed the deal was a no-started and they were correct with the board of the LSE responding days later saying they didn’t see any reason to enter talks.
In 2017, a proposed merger between the LSE and the German Deutsche Boerse was blocked by EU regulators due to fears over a lack of competition. There is likely to be more scrutiny for an exchange because of the regulations in place for this type of company and worries over it monopolising the industry.
The office-sharing company WeWork has delayed its $20 billion IPO (Initial Public Offering) after a lack of investor interest at their current valuation. At the start of the year, there were thoughts they would be seeking a valuation of around $47 billion. Investors main concern appears to be around how long it will be until it is profitable, if it can make it at all. They hold expensive leases and there are doubts on how it is being run as well as customer loyalty. Ultimately, it’s not difficult for another business to offer shared working space and if it undercuts WeWork, customers could look at it as a better alternative for their business.
Revenue last year was $1.8 billion last year, but they lost $1.9 billion. The Japanese technology company, Softbank urged them to delay, but WeWork is likely to want investment sooner rather than later. They have a $6 billion loan and will need more capital to keep their operations going.
Discounter supermarket Aldi plans to open a new store on average every week in the UK in the next two years as they aim to increase their coverage and with that their market share. Last year, Aldi’s revenue grew by £1.1 billion, but they did reduce their profits by 18%. In a bid to gain more customers and keep their prices low, they have taken the profit hit with the aim to take more market share. With more loyal customers, it would give them more scope in the future to make more money.
Nearly half of UK households shopped at Aldi last year, and the CEO believes with more coverage this can be bolstered. Figures show they are continuously gaining on the so-called ‘big four’ supermarkets and their ambitious plans include opening smaller ‘local’ stores in some areas.
Questions to ask yourself... Would Aldi start losing market share if they increased prices slightly? What could the LSE gain from merging with another company in a different region? How can WeWork become profitable while still being competitive for their customers?