Tuesday 03 May 2022 5:30 pm

The City View: Michael Hewson on why calls for a windfall tax are misplaced

Today Andy Silvester talks to Michael Hewson, Chief Market Analyst at CMC Markets. They pick apart the arguments for a windfall tax on BP, discuss potential rate rises from the Fed and Bank of England, and go through the impact that China’s zero-Covid policy has had on manufacturing in the country.

And in other news — there’s been a mixed response from investors to break up HSBC, a fat-finger error from a Citibank trader last week almost triggered a flash crash, and Europe continues to deliberate over whether to ban Russian oil and gas.

Episode transcript (auto-generated)

Andy Silvester 0:08 Hello and welcome to City A.M.’s daily podcast The City View — I’m Andy Silvester editor here at City A.M. I hope you had a wonderful bank holiday and a back to the grindstone today big news out of BP this morning and indeed lots to talk about in the world of central bank economics. I’ll be discussing both in just a minute with CMC markets Michael Hewson, but in the meantime, here’s what else is going on today. mixed response from investors to calls over the weekend to break up HSBC shares up a little in London and a little in Hong Kong in response to the Chinese insurance giant ping and going more public with its calls for the bank to split its Asian operations from its rest of the world operations. The bank, of course, still HQ in London been here for 30 years or so since it took over Midland Bank. But most of the profits generated in Asia lots of controversy recently as well over hspcs relationship with the Chinese Communist Party and with Hong Kong’s leadership so that one is going to run and run in bank news. Also Citibank today admitting that a fat finger from a trader almost triggered a flash crash last week indeed cause all sorts of chaos on the stock exchange. Elsewhere, Pfizer’s first quarter ribs have exploded in comparison with last year setting in stone, it’s avoided the much feared COVID-19 cliff edge the decline of COVID-19 and indeed the number of vaccines given out by Pfizer going down Hance spooks investors. But the pharma giant appears to have used its money wisely 20 point 4 billion in revenue in the first quarter of the year 77% increase on last year, all of that buoyed by the anti viral pill packs loaded BrewDog the embattled brewers to hand out shares worth around 120,750 staff over the next four years, launched the first ever profit sharing scheme in its history, and is looking to move on from a rift with disgruntled former employees founder and chief exec James want never too far from the headlines responding to a very damning BBC documentary in the middle of last year, which accused him of generally a pretty miserable culture at the firm. you’ll all remember of course, that open letter from former employees accusing a lot of publicity stunts, and much worse anyway, he’s giving away a stake and will he hopes bring workers on site to mark the group’s 15 year anniversary. Elsewhere. Good news for card factory all those delayed pandemic weddings resulting in a boom for the greeting card industry. Boris Johnson has reportedly been called in to try and twist the arm no pun intended of arm, the Cambridge based semiconductor firm to list in London rather than in New York. And of course, continue around in Europe over whether or not the continent is to borrow Russian oil and gas in the near future as war in Ukraine continues to rage. But much of the discussion today and indeed for the rest of the week. It will be about the energy companies the rest of the discussion will no doubt be about rate rises and talk about both of those with me is CMC markets. Michael Hewson back for his fortnightly slot news from BP today, Michael, I think it’s fair to say that this is one of those corporate results stories that dropped at 7am. This morning, as I rolled over to check my iPhone. I mean, you’re already up on about in your laptop. But as I rolled over to check my iPhone, it looked very much like a business story that was seemed to get caught in the political crosshairs. And by about 10 past eight on the Today programme this morning on the radio, it was obvious that it had lots of chatter about windfall taxes, lots of chat about bumper profits. But it wasn’t really a day of bumper profits for BP.

Michael Hewson 3:52 Now, I think if you if you’d read the headlines from the mainstream media, the focus would have been on the underlying replacement cost profit of $6.2 billion for the first quarter, which was up from $2.6 billion this time, four months ago. But that overlooks the not inconsiderable fact that BP said to take a $29.3 billion write down on its Rosneft stake and any of any and all the other assets that it’s exposed to in Russia. So actually, the profit or loss attributable to BP shareholders was a loss of nearly $20.4 billion. So I’m not sure what these politicians think they’re going to be imposing a windfall tax on Yes, BP did announced they were going to do another two and a half billion dollar buyback and you could certainly criticise them for that. And you could certainly criticise them for the fact that their capex over the first quarter was $2.9 billion, which is considerably But below the number in q4 as well as the number 12 months ago, but to suggest that they’re making obscene profits overlooks a not inconsiderable important fact that they posted a huge loss.

Andy Silvester 5:14 Yeah. And if you were, you know, Ben Looney sat down in the office today, looking at the headlines looking at the barracking that the company is getting from politicians that should be said, mostly in the Labour Party for these alleged profits. He must be sat there thinking all hang on we, we did the right thing by getting out of Russia, we could have stayed, our profits would have been, you know, more, far more it would existed for one thing, have we not done the right thing? And they would have got a kicking for that. And now they’re having a kicking for, you know, making money as an energy company through underlying profits. They must wonder whether politicians really, I mean, it’s probably a lot of question, but wondering where the politicians really get business at all, or whether they just see it as something to kick from time to time.

Michael Hewson 6:07 I think it suits a particular political narrative, it’s very easy to blame energy companies for all the woes of the global economy. But the fact of the matter remains, and it’s an inconvenient fact that we need energy companies. And perhaps if governments thought more about perhaps trying to encourage them to invest in renewables, rather than kicking them all the time, we’d have much we’d have a much more constructive debate about it. When I actually looked at what Mr. Looney had to say, this morning, he is mindful, obviously, of the look, that, you know, bumper underlying replacement cost profits, brings because he’s committed to spend about 18 billion pounds in the UK, by 2030. In pursuit of these transition costs, so I don’t think it’s lost on him that these numbers were likely to get picked apart. But if you want to pick apart numbers, let’s pick apart these in 2020. BP lost $20.3 billion when oil prices went down to around about $15 a barrel. Now last year, this was followed by a profit of $12.8 billion. So it didn’t even cover the previous year’s losses. And this quarter, BP have lost $20.3 billion. So over the course of the past two years ever made a beam?

Andy Silvester 7:31 Yeah. Yeah, I mean, Bernard Looney doesn’t help him. So it didn’t help himself when he referred to the company as a cash machine. I think that was his one misstep recently. But you did see today, a certain level of appreciation that you did, I fortunately have to play the political game from time to time, but I think the thing for me in a windfall tax is, as you alluded to massive losses in 2020. And I don’t recall, politicians queuing up of either stripe to say, Well, it’s time to bail out the energy companies, because otherwise they’re gonna go costs and not be able to, you know, to keep the lights on next year. So it’s sort of if you’re going to if you’re going to demand actually, and also there are, by the way, other tax implications for energy companies anyway, or over and above the, the usual news element,

Michael Hewson 8:15 you pay a lot of tax anyway, over and above what ordinary companies pay in any case, so the focus needs to be much wider. But also, I think the discussion really needs to be much more chill much more mature. And less infantile.

Andy Silvester 8:30 Yeah, well, quite. We, we are never infantile on this programme. As you know, Michael, why don’t we have a look at the week ahead, because our front page today a thumbs up, two thumbs up really one in holding a US flag one with a British flag. We’re expecting rates to go up both sides, the Atlantic this week, much priced in, but just just give us the read through of where we are and what the markets are expecting. Because I think we’ll all be pretty surprised if it doesn’t work out that way.

Michael Hewson 9:03 Oh, yeah, absolutely. I mean, I think the RBA, the Reserve Bank of Australia has already surprised markets today by raising their headline rate by 25 basis points, which was slightly more than expected. I think there was an expectation they might hike, but a little bit of uncertainty because of the federal elections is due later this month. So obviously, that’s now shifted the focus on the Federal Reserve and to a lesser extent, the Bank of England on Thursday. So what are we expecting? We’re expecting the bare minimum from the Fed 50 basis points? I don’t think that is in doubt. I think for me, I think the bigger concern or the or the biggest thing that I’m looking at is the Feds forward guidance ahead of their CPI. I’d have CPI numbers next week. Are they going to do another 50 basis points in June? More importantly, what are they going to do with their balance sheet because I think there is an expectation that perhaps they might also announce that beginnings of a balance sheet reduction programme of around about $95 billion a month. So I think that could well be an outlier. What do they do with their growth forecasts? What do they do with their inflation forecast forecast. So at a bare minimum, I would expect to see a 50 basis point rate hike, as well as an announcement about balance sheet reduction. So what does that mean going forward? It shifts the focus to the Bank of England, obviously, on Thursday. Now, at the moment, I think markets are pricing in 25 basis points. But as with everything with the Bank of England, it’s about their forward guidance. And we’ve got the first quarter GDP next week, which is likely to be it’s not likely to be great, given some of the indicators that we’ve seen, for March, the declining consumer confidence, the horrible retail sales numbers that we saw in March, and the Bank of England is in a bit of a bind, because ultimately, they’re going to be hiking rates into a inflation spike. Never before seen, I think 54% rise in energy prices council tax going up. Pretty much a whole host of other costs going up. The biggest problem, though, is the inflation impulse is being exacerbated by a decline in the value of the pound against the dollar. Which means that if they’re dovish, they’re gonna make that much worse than sending the pound down even lower. So they’ve got to strike a balance, do they go for 50? Perhaps, and surprise the markets, as well as revising down their growth forecasts and revising up inflation forecasts or they go for 25 and say they’re committed to hitting their inflation target with a whole host of other rate hikes. As the economy develops.

Andy Silvester 11:54 Yeah, it’s going to be some certainly one to watch. I think as you say, there aren’t there are fewer questions about the Fed decision. With the bank. It’s it’s, I mean, that they’re in the middle of it. If we weren’t on the radio, it is a rude word, but they’re in the middle of a storm, to say the very least at the minute and it’ll be interesting. Andrew Bailey’s well, just before we go, and whilst we’ve got you interesting manufacturing numbers out of China today, Asia mark is off to a slow start this morning. You’ll start seeing that impact of the various lockdowns and zero COVID. And I guess markets must now be despite all of us thinking rationally, surely China is giving up on it zero COVID policy, and there seems no sign off.

Michael Hewson 12:38 No, China isn’t giving up on it zero could be policy, at least not yet. You know, when you talk about the manufacturing numbers, and obviously, they are very disappointing. But for me, they paled into insignificance to the services numbers that we saw at the weekend, which fell even more sharply to 41.5, which is, you know, basically, in contraction territory. And the fact is that while manufacturing is widely acknowledged, to make up a significant proportion of the Chinese economy, services is now much bigger and almost 50% of the economy, as well. So if the Chinese consumer isn’t spending, and they can’t, if they’re locked down in Shanghai with the potential be locked down in Beijing, then China isn’t going to hit its five and a half percent GDP forecast by the end of this year. And that does present a real concern, I think, for global economic growth. On the flip side, however, it has pulled oil prices down, which should I think, if continues, offer a little bit of a respite for Harper’s consumers when they go and fill up at the pumps.

Andy Silvester 13:43 Yes, indeed. There’s always there’s always a bright side. Michael, you always wanted to find a bright side. Thanks so much for joining us as ever. We’ll see you again a fortnight.

Michael Hewson 13:50 Absolutely. Cheers, Andy. Thank you.

Andy Silvester 13:53 Thanks, Michael. That was Michael Hewson of CMC markets. That’s all we’ve got time for today on the city view podcast, something of a canter around global markets and global corporate results. We’ll be back tomorrow for much more of the same I’m sure