EU Slams Google With Massive Fine

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What's going on here?

The European Union (EU) fined Alphabet Inc., the parent company of Google, a record €2.42 billion on Tuesday for abusing its dominant position in internet search – and it matters for other tech giants too…

What does this mean?

The judgement against Alphabet relates specifically to Google favoring its own price-comparison shopping service over competitors in search results (e.g. search the term “grill” and you’ll find Google’s price comparison ads at the top). But the principle at heart of the matter is potentially game-changing: the EU is saying that a company cannot use its dominance in one area to market its own services in another area at the expense of other competitors. For example, that could apply to other types of Google searches (like for locations / maps). Companies like Amazon or Facebook could also be affected (e.g. perhaps it means limiting the promotion of Alexa devices on Amazon’s ecommerce platform).

Why should I care?

For markets: The news wasn’t a big deal for investors.

While Alphabet’s stock sold off more than 2% on Tuesday, it was part of a wider selloff of big US tech companies. €2 billion is little more than a drop in the bucket for Alphabet, which currently has $90 billion in cash. The bigger challenge could be longer term since its business practices in Europe may have to change. With a lengthy court battle to refute this charge looming, it’s unlikely to materially affect Alphabet’s performance in the near term.


The bigger picture: The EU has a history of challenging big US tech firms.

A decade ago, the EU fought an epic battle with Microsoft concerning its Windows product. More recently, the EU forced Apple to pay €13 billion of back taxes to Ireland. These are two of the more prolific examples, but there are various others. American competition authorities have taken a much less aggressive line, leading to calls that the EU is treating American tech companies unfairly.

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Draghi Powers Down Bonds

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What's going on here?

The President of the European Central Bank (ECB) made some comments on Tuesday that investors interpreted to mean that higher interest rates in the eurozone are on their way. And that’s a bigger deal than it sounds…

What does this mean?

In recent years, the ECB has been directly buying European bonds in an effort to help the economy grow (click here for background). By buying the bonds, the ECB has been pushing up bond prices – which pushes down bond “yields”, a.k.a. interest rates (why? click here). Now that the eurozone economy is growing more quickly, the ECB is likely going to decrease the amount of bonds it buys each month. This should have the effect of pushing down bond prices and pushing up interest rates – which, in turn, increases demand for the euro (because investors move their money where they can earn those higher interest rates). Relatedly, the euro rose on Tuesday to its highest level versus the dollar since September 2016.

Why should I care?

For markets: European and US bonds sold off in response to the comments.

If the ECB buys fewer European bonds, that’s clearly bad for the price of European bonds. But it also impacts other bonds, including US bonds. Why? Many global investors in recent years have sold European bonds (essentially to the ECB) and bought US bonds with the proceeds. If the ECB buys fewer European bonds, there is less money to buy US bonds, which pushes down their prices and pushes up US interest rates.


The bigger picture: The ECB’s move would be in line with the actions of other major central banks.

For years, central banks around the world have been trying to support their economies by keeping interest rates low (which encourages borrowing and, thus, spending). But major central banks are now moving in the opposite direction (albeit, in the ECB’s case, very slowly). This gradually removes a major tailwind for economic growth and, by extension, stock prices.

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Big Bail Out for Italian Banks

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What's going on here?

In a piece of news that’s reminiscent of the 2008 financial crisis, the Italian government has agreed to spend up to €17 billion to bail out two of the country’s struggling banks – and that’s a big deal for Europe’s banking sector.

What does this mean?

The bailout concerns two medium-sized Italian banks that have made a bunch of loans which are unlikely to get paid back in full, a problem they share in common with other banks in Italy and the eurozone. Somehow, without these loans being repaid, the banks still have to pay out money to their everyday customers when they withdraw their deposited cash.


By law, depositors must get paid back before anyone else, and one way that banks under financial distress can still meet depositor demand is to default on money lent to banks through bonds. But this isn’t happening here. Instead, the Italian government will pass on taxpayer money so the banks can pay their “senior” bondholders in full – a move that is provoking some controversy.

Why should I care?

The bigger picture: The era of taxpayer bailouts is supposed to be over in Europe.

A few years ago, the EU built a rulebook that was designed to put an end to taxpayer-funded bailouts. It’s part of an effort to create one set of rules for all eurozone banks to follow, but Italy’s bailout, achieved via a loophole, breaks the spirit of those rules. This could threaten the establishment of a eurozone-wide banking system (an important project for the EU).


For markets: European stocks reacted positively.

In previous years, this scenario would have likely spooked investors throughout Europe amid fears that more lenders might be on the verge of failure, thus hurting the overall economy. However, the distinct lack of contagion within the banking sector helped lift European stocks on Monday.

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US Investor Bites Into Nestle

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What's going on here?

Nestle’s stock price hit a record high on Monday (tweet this) after a well-known US investor said he had bought a $4 billion stake in the company and wanted to see some new strategic initiatives implemented.

What does this mean?

Nestle has already seen a number of big changes this year – a new CEO took over in January and announced substantial changes to the way the company does business, including the possible sale of its American candy business and a move towards investing in healthier foods.


However, the big investment by American investor Daniel Loeb might just accelerate the pace of that change. The purchase makes Loeb one of Nestle’s biggest and most influential shareholders, and Loeb has already called for a raft of changes (see below). For its part, Nestle has coolly acknowledged Loeb’s demands and said that they already align with their new CEO’s existing vision for change.

Why should I care?

For markets: Nestle shareholders seem to like Loeb’s ideas.

Loeb wants Nestle to sell its holdings in businesses that aren’t core to its operations, like its 23% ownership of cosmetics company L’Oreal. He also wants Nestle to borrow more money and use it to buy its own stock, which would help push up the stock price. Investors sent Nestle’s stock up almost 5% on Monday, suggesting they are optimistic that these (likely) profitable changes will be implemented.


The bigger picture: Americans are turning up the heat on some big European companies this year.

A few months ago, Kraft-Heinz tried to take over consumer goods giant Unilever. The idea was that Kraft-Heinz would run the company more profitably by stripping out costs and borrowing more money – which would increase returns for Unilever shareholders. While the situation with Nestle is obviously different, the rationale of Loeb’s investment is similar – and another sign that some big European companies are facing pressure to become more ruthless in their corporate strategies.

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America’s Tiring Economy

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What's going on here?

There have been a few more signs in recent days that US economic growth is softening more than expected – and that’s often bad news for stocks.

What does this mean?

On Monday, a report showed that orders for “durable goods,” which are products typically meant to last for more than three years, fell significantly more in May than expected. That’s sometimes a sign that businesses are pulling back on “investing”, e.g. buying new equipment. On Friday, an influential survey suggested that business activity has grown at its slowest pace in three months during June. There was, however, some good news: “new orders” from customers increased, which means businesses are seeing signs that activity will increase faster in future months. All in all, though, the current data suggests that the US economy is probably growing more slowly this year, so far, than it has in recent years.

Why should I care?

The bigger picture: The US Federal Reserve (“the Fed”) may be increasing interest rates while economic growth slows – which is a dangerous combination.

Higher interest rates make growth harder to achieve because it becomes more expensive for people and companies to borrow, and thus spend, money (among other reasons). As such, the Fed usually tries to only take action to increase interest rates when economic growth is increasing. The Fed has said it intends to press ahead with actions to keep pushing up interest rates; investors will be watching closely to see if it sticks to those plans.


For markets: The global economy may be providing less of a tailwind to stocks.

China, which is the world’s second biggest economy, appears to be experiencing slower economic growth relative to last year. The US may be in the same boat and Britain is performing notably worse. The bright spot is the eurozone, which continues to post encouraging data, but the overall global picture is weaker than many investors had anticipated. That should, in theory, feed through to lower profits for companies. However, with stock prices still near record highs, investors don’t seem too worried!

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End of The Rainbow For Irish Bank

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What's going on here?

On Friday, Europe turned another page on the era of “too big to fail” as the Irish government sold off a portion of its shares in Allied Irish Banks, an Irish lender that the government bailed out and took over in 2010 at the peak of the eurozone debt crisis.

What does this mean?

From the UK to Cyprus to Germany to Portugal, European governments spent tens of billions of euros rescuing nearly 40 separate banks that were on the verge of bankruptcy during the financial crisis. Recently, as some of these banks have started to turn a profit again, some governments have begun to sell their holdings of the bailed-out banks to private investors. Ireland joined their ranks on Friday, selling off 25% of AIB’s shares in an initial public offering (IPO). The Irish government has said it hopes to sell the rest over the next few years.

Why should I care?

For markets: As Europe’s economy strengthens, investors have been more willing to buy European bank stocks.

Stronger economic growth means that businesses should be able to sell more goods and services to consumers, while everyday people should also be enjoying a stronger job market and rising wages. For banks, that means more entrepreneurs will need loans and more consumers will need banks to help finance the purchase of homes or cars, both of which are usually good for banks’ profitability (and one reason why investors have pushed up the stock prices of European banks).


The bigger picture: Many European banks are turning a corner, but some are still in deep trouble.

Just this weekend, two small Italian banks were forced into bankruptcy after Europe’s banking regulator determined that they were overburdened by bad loans they had made. While quickening economic growth in Europe should help reduce the volume of banks’ bad loans, it’s worth remembering that banks in some parts of Europe are still struggling under the weight of loans they have previously made.

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BlackBerry Goes From Sweet To Sour

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What's going on here?

BlackBerry’s long promised recovery stumbled on Friday after the company reported a big drop in revenue during the second quarter of 2017 (versus a year ago). Shares in the company plunged by nearly 11%! (tweet this)

What does this mean?

BlackBerry, once a world leader in smartphones, has completely changed its strategy in the four years since its newest CEO took over the company. After failing to successfully market phones that could seriously compete with Apple’s iPhone, the company opted to shed its mobile phone division and turn itself into a software company, anchored in cybersecurity and self-driving cars (although it still licenses the brand to other manufacturers). On Friday, however, that turnaround appeared to be further away than investors had thought after BlackBerry reported lower-than-expected sales from its software division.

Why should I care?

For markets: BlackBerry’s stock was having a great year, but investors got a little ahead of themselves.

Before it reported earnings on Friday, BlackBerry’s stock had risen by 62% since the beginning of the year. The stock was particularly buoyed by an $815 million payout to the company from Qualcomm, one of its business partners, following the settlement of a legal dispute over royalties between the two companies. But with revenues from its key software business not growing as quickly as expected, investors’ optimism seems to have soured somewhat.


The bigger picture: BlackBerry has turned itself around by slimming down – often a good strategy for unprofitable companies.

In the same quarter a year ago, BlackBerry lost $670 million. This year, the company turned a small profit (even excluding the big payment from Qualcomm)! It achieved this largely by shedding old, unprofitable businesses – like making phones – and focusing on its growing software business, where BlackBerry feels it has a competitive advantage. It’s a long way from a total turnaround (as Friday’s results show), but there are at least some reasons to be optimistic.

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Imagining A Life Without Apple

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What's going on here?

Shares of Imagination Technologies, a British tech firm that designs graphics chips for Apple, soared more than 20% on Thursday after the company said it was putting itself up for sale.

What does this mean?

Imagination got some bad news earlier this year: Apple, which is its biggest customer and accounts for about 50% of its revenue, announced that it would no longer need Imagination’s design for the “graphical processing units” in Apple products and would start building its own chips from 2019 onwards. Following that news, Imagination’s stock dropped by almost 60% in a single day!


Fast forward eighty-one days and Imagination is putting itself up for sale, essentially admitting that it will be extremely difficult to continue on its own without Apple’s business. However, Imagination said that it’s already been approached by a number of interested firms about a takeover – news that investors appeared to like.

Why should I care?

For markets: Investors seem to smell a deal on the horizon.

The sharp rise in Imagination’s share price on Thursday suggests that investors are optimistic that Imagination will find a suitable buyer (like another chip firm). Of course, the company’s share price is still way, way below its level prior to Apple’s announcement, and Imagination has made clear that there’s no guarantee it’ll find a buyer.


The bigger picture: Companies with a concentrated customer base run big risks.

Smaller suppliers with links to big companies like Apple are at risk of becoming far too dependent on individual contracts. Dialog, a semiconductor manufacturer that makes 70% of its revenue from sales to Apple, saw its shares drop by more than a third when news broke in April that Apple might start moving its battery business in-house. In any industry, a company is running a big risk when it relies on a single customer for most of its revenue.

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Qatar Courts American Airlines

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What's going on here?

Qatar Airways unexpectedly announced on Thursday that it intended to buy a sizeable chunk of American Airlines, a move that would make Qatar Airways one of American’s largest shareholders.

What does this mean?

Qatar Airways is planning to buy almost 5% of American Airlines’ stock on the open market and, with the approval of American’s board of directors, it hopes to increase that stake to nearly 10% (due to a quirk in American’s corporate rules, anyone wanting to own more than 4.75% of the company needs the board’s approval).


Acquiring a big chunk of American fits with Qatar Airways’ strategy of buying substantial stakes in international airlines, like it has with British Airways’ parent company and LATAM, a South American airline. As with those investments, Qatar is not intending to have any management role nor seats on the board.

Why should I care?

The bigger picture: The proposal comes amid a feud between US airlines and Gulf airlines.

US airline executives (including American’s CEO) have been very vocal in recent years about their desire to limit “state-owned” Gulf carriers (like Qatar) from expanding their US operations. To them, Gulf carriers are unfair competitors because they enjoy generous subsidies from their governments. American, however, said on Thursday that Qatar’s intention to invest doesn’t mean American will pull back in its fight against Gulf airlines’ expansion in the US.


For markets: American’s stock jumped up initially but then fell back.

Shares in American initially jumped around 5% on the news, but it lost most of those gains after it became clear that American’s board of directors was cool to Qatar’s plans. The tepid response suggests that Qatar is unlikely to receive the approval to buy more than 4.75% of the company – meaning that upward pressure on the share price won’t be as significant.

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Nike Swooshes Into Amazon

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What's going on here?

According to various media reports, Nike has agreed to allow Amazon to sell its products directly – and investors are saying just do it! (tweet this)

What does this mean?

Nike has, obviously, partnered with third-party retailers throughout its history (like Foot Locker), but has, until now, refused to sell directly to Amazon. However, as the appeal of in-store shopping at places like Foot Locker has declined, selling its apparel online has become more important to Nike. The company is ramping up its own ecommerce efforts, but it appears to be targeting a broader audience via Amazon as well. Also, by selling directly to Amazon, Nike can exert more control over how its products are marketed on Amazon’s platform (currently, other retailers can sell Nike gear on Amazon indirectly).

Why should I care?

For markets: Nike’s investors embraced the news; Foot Locker’s stock, however, struggled.

Nike’s stock was up about 2% on Wednesday, following reports that the deal could occur. Investors presumably like the idea of Nike taking advantage of Amazon’s platform, particularly given that Nike’s sales have begun to decline amid an increasingly competitive sportswear industry. The stock prices of other third party retailers, like Foot Locker, sold off sharply (about 5%) as they likely face a loss of sales to Amazon.


The bigger picture: Technology is killing traditional middlemen.

The business of putting together sellers and buyers, in lots of industries, is being indelibly disrupted by technology. For example, stock and bond traders are being replaced by algorithmic trading in the same way that third-party retailers have been Amazonized. Businesses that sell other businesses’ stuff increasingly have to be among the technology leaders in their space in order to survive.

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