TheChek News Flow

You can just imagine what Disney CEO Bob Iger was thinking today: If it’s not one thing, it’s another. Disney surprised the market by reporting that its streaming services all but broke even in the March quarter, a notable achievement given that it was wallowing in red ink just a few quarters ago. But the pesky worrywarts of the stock market chose to worry about Disney’s forecast of a slowdown in its theme park business in the June quarter. Disney stock dropped 9%, its lowest point since early February, before Disney’s publicity campaign aimed at fighting activist investors sparked a rally. Hopefully Nelson Peltz, who waged a losing battle for board seats, sold his stock at a high. Otherwise he may start a new campaign!

To be sure, the market is right to fret (the market is always right, isn’t it?). For one thing, theme parks have kept Disney healthy the past couple of years, as it was suffocating from streaming losses and the slow death of cable TV. And now, while Iger may have plugged the red ink flowing out of streaming, the TV networks’ business deteriorated markedly in the quarter. That makes any slowdown in theme parks less than ideal.

And let’s face it, the improvement in streaming isn’t necessarily as good as it might appear to be. The profitability metric Disney reports for its individual business segments is operating income (or lack thereof), not free cash flow. A streaming service reporting an operating profit isn’t necessarily generating cash. We learned that from Netflix, which burned billions in cash for years while it was reporting operating profits. That’s because its cash flow statement reflected the immediate impact of its lavish spending on programming, but on the profit and loss statement, that spending is spread out over a period of years, allowing its profits to look healthier than they were.

Still, even with that qualifier, Iger has scored a notable success in putting the streaming business in a much healthier position, through cost cutting, price hikes and subscriber growth. Now comes an equally hard task: making streaming a decently (and truly) profitable business.

Rafah, the city in southern Gaza, is distinct from the border crossing and the Egyptian city of the same name, on the other side of the border. Where does Israel's 'limited' invasion stand and how did Egypt prepare?

Since the early days of the current Gaza war, Rafah, in southern Gaza, has been a subject of debate and contestation. For months, Israeli Prime Minister Benjamin Netanyahu has threatened to operate in the area where some 1.2 million Palestinians are sheltering, calling it the last Hamas stronghold and the final impediment to his oft-repeated "total victory."

Opponents of the plan, among them leaders the world over, including that of Israel's closest ally, the United States, and aid organizations, have warned of a humanitarian catastrophe should Israel enter Rafah.

On Tuesday, the Israeli army took control of the Palestinian side of the Rafah border crossing that connects Gaza with Egypt. Already, dozens of Palestinian deaths have been reported as a result of what Israel says is a "limited incursion."

Israel committed to the U.S. and Egypt to restrict its operation, aiming only to deny Hamas authority over the border crossing, and concentrating on the eastern side of the city.

Rafah: city and border crossing

While the two are sometimes discussed interchangeably, the Rafah border crossing takes its name from the city of Rafah, which is situated in southern Gaza, about 30 kilometers (18 miles) from Gaza City in the enclave's north.

The city's regular population of a few hundred thousand Palestinians ballooned to over a million – about half of Gaza's entire population – when residents of Gaza City and Khan Yunis were evacuated from their homes ahead of Israel's ground invasions there. The vast majority of displaced people are still believed to be sheltering in Rafah, crammed into makeshift tents, where the imminent threat of famine and disease looms large.

The Rafah border crossing, on the other hand, is a 12 kilometer (7 mile) strip of land that separates Egypt from the Gaza Strip. Like other hotspots in the region, control of the crossing has changed hands over time through wars, agreements, treaties and attacks. It is Gaza's only crossing not directly controlled by Israel, with the flow of people, commercial goods and humanitarian aid technically coordinated by Egyptian and Palestinian authorities. Nevertheless, since Israel's 2007 blockade, the crossing is closely monitored by Israel and only intermittently open to Palestinians.

According to a United Nations report, the Rafah crossing was open for 245 days in 2022 and 138 days in 2023, before it became all but inoperable at the start of the war on October 7.

Rafah, Egypt

Just over the border, on the Egyptian side of the crossing, is another city, also called Rafah. The shared name is no coincidence – historically, it was all one city, but when Israel withdrew from the Sinai Peninsula in 1982, the newly demarcated border divided the area into two separate cities, one in Egypt, the other in Gaza. For as long as Israel has threatened to invade Gaza's Rafah, Egypt has loudly condemned any potential military operation into the city. Even as Israeli tanks rolled in this week, the Egyptian government issued a statement calling the move "a dangerous escalation."

But since the beginning of the war, Egypt's words have not necessarily matched its actions. A week after Hamas attacked Israel's southern communities on October 7, Egypt's Foreign Minister Sameh Shoukry told an interviewer on BBC's Newshour that from Egypt's perspective, "the Rafah crossing on our side is officially open." The Egyptian government also asked Israel to halt strikes near the border so that the crossing could serve as a "support lifeline" for people in Gaza.

But reports that Egyptian authorities were severely limiting the influx of Gazans looking to escape the war by entering Egypt, to prevent the mass displacement of Palestinians into the Sinai Peninsula, began to emerge. In February, the Associated Press published satellite photos which showed construction of a wall on the Egyptian side of the crossing, part of a "buffer zone" to accommodate Palestinians should a Rafah offensive prompt an exodus en masse, sources told Reuters at the time.

Last month, top Israeli and Egyptian military and intelligence officials reportedly met in Cairo to discuss the Rafah issue. At the time, the Egyptian newspaper Al-Shorouk published a statement attributed to an Egyptian source saying that any invasion of Rafah would violate the Israel-Egypt peace treaty and receive a decisive response from Cairo.

But as Axios reported at the time, the meeting, which was said to include Ronen Bar, the head of Israel's security agency the Shin Bet, and Herzl Halevi, the Israeli military chief of staff, alongside Abbas Kamel,

the head of Egypt's intelligence service, and Osama Askar, the chief of staff of the Egyptian Armed Forces, concluded with an announcement by Israel that it was "moving ahead" with the assault on Rafah. In a somewhat perplexing statement released after the meeting, Egyptian security officials asserted that coordination between Egypt and Israel regarding the assault on Rafah did not imply the country's approval of the operation.

It's one explanation for why Egypt has taken such an active role in the latest round of negotiations for a cease-fire and hostage release deal. While the country is proving to be largely powerless to actually prevent an Israel military invasion into Rafah, the Egyptians appear to have pinned their hopes on a deal to that would see Israel's hostages returned and, potentially, a sustained cease-fire that could prevent a realization of their primary concern, namely an influx of refugees over the border.

Anticipated return to normal for credit trends may bode well for spending

More consumers have been struggling to pay off their debts, and are likely tightening their belts. Thankfully for the economy, others can pick up the slack.

Federal Reserve data at the end of last year showed that borrowers on cards and auto loans were moving into delinquent status at the fastest pace in several years. Some more recent readings, though, contain signs of a slowdown in that deterioration. Data on card loans collected by analysts at Jefferies showed the delinquency rate slipping 0.18 percentage point from February to March, better than the usual seasonal trend.

This would be consistent with what many lenders are saying. The economy has been working through what remains of the big bump in income and savings that many consumers experienced during the pandemic and its aftermath, which led to a lending boom now reverberating in that jump in late payments. Following that, trends seem to be returning to normal, even if many consumers are still feeling the squeeze of higher borrowing and other costs.

Digital consumer lender Upstart UPST -7.19%decrease; red down pointing triangle on Tuesday told analysts that it believes “the wave of elevated defaults propagating from the abrupt stimulus and de-stimulus of the economy in 2021 is now at or very close to its peak,” and that it anticipates higher revenue from fees generated by lending in the second half of the year than in the first half.

“We feel like this sort of pandemic and postpandemic stimulus effect is really running its course,” Chief Financial Officer Sanjay Datta told analysts. “So, that gives us some comfort that we’re kind of back to the world that we know.”

The JPMorgan Chase Institute, which studies the bank’s anonymized account data, wrote in an April note that the most recent trends suggested that “many consumers have depleted their excess savings and are returning to more routine saving behavior.”

Others were also seeing signs that the market was adjusting to the new lending conditions. Equifax Chief Executive Mark Begor told analysts this week that “while the subprime consumer is working, inflation has pressured them, so there’s no question delinquencies went up,” causing lenders to pull back. But he noted that this pullback is generally “bottoming out,” and that there are signs of growth in subprime lending again, though at a lower level than the last cycle.

Investors for now seem to be taking a cautious view. Upstart shares were down about 10% on Wednesday. Affirm AFRM -9.46%decrease; red down pointing triangle shares also dropped about 10%, even though the buy-now-pay later lender reported quarterly volume above analyst expectations and didn’t see a year-over-year change in its delinquency rate on monthly installment loans. Executives told analysts that because the summer is a “seasonally high delinquency rate time,” the next move in delinquencies is “more likely up than down.”

But it isn’t clear that all spending trends are going to be affected by this adjustment to more normal credit patterns. Shopify SHOP -19.61%decrease; red down pointing triangle, the payments and e-commerce provider, said that “we think the consumer remains resilient.” Affirm said it has the flexibility to do things like subsidize the cost of borrowing to attract more shoppers with stronger credit.

Executives at Toast TOST 13.53%increase; green up pointing triangle, which provides payments and other services to restaurants, said on Tuesday that while first-quarter gross payment volume per location was down 2% year over year, that after January’s tough weather the trend had “bounced back” to similar to what was seen at the end of 2023. Shares of Toast were up more than 10% on Wednesday.

What may turn out to be the case is that consumers who aren’t as squeezed by higher debt or less available credit can pick up the baton from those who have run out of steam. Those who can spend probably will.

Traders boost bullish bets on European gas prices

Wagers on rising prices point to concerns over potential supply disruptions

Traders have boosted their bets on a rise in European gas prices to the highest level in more than two years, indicating growing concerns about potential disruption to supplies.

Net long positions held by investment funds in futures contracts linked to Europe’s main gas benchmark have soared to 96.4 terawatt hours, worth about €30bn at current prices, according to data from Intercontinental Exchange released on Wednesday. That represents the largest bullish bet since February 2022, days before Russia started its full-scale invasion of Ukraine and made deep cuts to its pipeline gas supplies to Europe, sending prices soaring.

Prices have since fallen dramatically as European economies reduced their gas usage and found alternatives to Russian imports, helping to fill storage facilities close to record levels. But those efforts have left the continent more reliant on the often volatile global market for liquefied natural gas.

Already in recent months, there have been disruptions at exporting facilities in the US and Australia, two big LNG producers. Investment funds have been building up their long positions since the start of Israel’s war in Gaza in October, which led to concerns about the transport of LNG through the Red Sea, where 13 per cent of Europe’s LNG supply passed last year, and other Middle Eastern waters.

“Funds are taking into consideration a possible reduction in LNG flows passing through two key straits” of Bab al-Mandab and the Strait of Hormuz, said Tom Marzec-Manser, head of gas analytics at ICIS, a consultancy. “There is upside risk and therefore a rationale for taking a long position.”

The European gas benchmark traded at about €30 per megawatt hour on Wednesday. While that is far below the peak of more than €300/MWh in the summer of 2022, it remains higher than about the €10 to €20/MWh typically seen before the gas crisis started in 2021.

Bullish bets by speculators come despite the EU’s gas storage being 63.8 per cent full as of Monday, the second-highest level on record for this time of year.

Most traders and analysts believe the EU will not have a problem refilling its gas storage facilities ahead of winter when demand rises. But they do not rule out further big price swings, particularly with gas demand rebounding recently, having remained subdued during the energy crisis.

Analysts at Morgan Stanley said “underlying gas demand” in April was up 8 per cent on the same month a year earlier.

There is also uncertainty over the future of the remaining Russian pipeline gas that reaches the EU via Ukraine. A deal between Kyiv and Moscow to allow for the transit, which accounts for about 5 per cent of the bloc’s supplies, expires at the end of this year. Ukraine has expressed its intention to not renew the deal.

Volkswagen warns Brussels against raising tariffs on Chinese electric cars

Move risks ‘retaliation’ against international brands in the country, German carmaker’s brand chief tells FT car summit

Brussels should not raise tariffs on imported Chinese electric cars, and doing so would risk “retaliation” against international brands in the country, the head of the Volkswagen brand has warned.

The European Commission is investigating electric car imports from China and is widely expected to raise tariffs in the coming months, after a surge in imports threatened domestic producers switching from combustion engine to electric vehicles.

But VW brand chief Thomas Schäfer said: “I don’t believe in tariffs. I want everybody to compete on the same terms.”

“There is always some sort of retaliation,” he told the FT’s Future of the Car Summit.

His comments echo concerns raised by Mercedes-Benz boss Ola Källenius, who in March called on Brussels to cut tariffs on Chinese EVs.

Carmakers such as Stellantis and Renault, which do not have large businesses in China, have been more vocal about the threat of Chinese electric vehicles. However, the probe has faced a backlash from German carmakers that are reliant on China for a significant portion of their sales and profits.

The EU investigation has already sparked criticism of protectionism from Beijing, which claims its companies are simply more competitive. The European boss of China’s BYD previously said the company does not rely on subsidies when manufacturing its vehicles.

At present, Chinese EVs are subject to a 10 per cent tariff when imported to Europe. European carmakers pay 15 per cent when exporting to China, which is part of the reason most German models sold in China are made in the country.

Some Chinese carmakers are exploring manufacturing locally in Europe as well. BYD confirmed in January that it will build a new car plant in Hungary to produce electric vehicles.

The call for higher tariffs also comes as international carmakers who had been dominant in the Chinese market have wrestled with declining sales amid the rise of lower-priced, tech-savvy local brands.

Volkswagen, which previously accounted for almost one in five cars sold in China, has seen its market share in electric vehicles fall to under 5 per cent.

Schäfer told the summit that the German carmaker remained committed to the world’s largest car market over the longer term despite acknowledging that it was unlikely to recover its once dominant position in China.

“It’s a tough market. You need to be on your toes but we are big enough, important enough for China and localised enough in China so there is no reason why we can’t follow the speed,” Schäfer said.

FCA surprised by criticism over ‘name and shame’ proposal, says chair

Ashley Alder says ‘no decision made’ after City minister defends right of government to question watchdog’s actions

The boss of the UK’s financial regulator has admitted the watchdog is surprised by the strength of criticism directed at its proposal to more regularly “name and shame” companies that are under investigation. 

Ashley Alder, chair of the Financial Conduct Authority, said on Wednesday that “no decision has been made” on how to follow through with the proposal, which has drawn criticism from the UK’s financial and legal sectors and chancellor Jeremy Hunt. 

“In truth, I think we weren’t, at the time we put this [consultation] out, expecting such a stern reaction from the industry,” Alder told the House of Commons Treasury committee when asked about the decision to press ahead with the proposal.

Aimed at improving transparency and deterring wrongdoing, the proposal would allow the watchdog to move from naming firms under investigation in “exceptional” circumstances to a looser “public interest” test. 

Alder’s comments came as City minister Bim Afolami defended the right of the government to question the FCA’s actions.

“Ultimately regulators are only there by acts of government or acts of parliament, or both,” Afolami told the Financial Times’s Crypto and Digital Assets Summit on Wednesday. “It’s really important that we accept that regulators operate under the umbrella that parliament has set.”

Afolami’s remarks come after Hunt warned the FCA last week against its plan to name companies under investigation more frequently, before any finding of wrongdoing, urging it to “re-look” at its decision.

Executives have claimed it undermines the principle that firms should be deemed “innocent until proven guilty” and fear it will harm the City.

The proposal comes less than a year after ministers gave the FCA a new secondary objective to facilitate the UK’s economic growth and international competitiveness. 

Asked whether the chancellor’s intervention risked politicising the watchdog or undermining the UK’s reputation for regulatory stability, Afolami said: “No, I don’t think that’s a danger.

“It is perfectly legitimate for the chancellor, or indeed anybody else, to say: ‘In this instance, we’d like you to think again,’” he said, adding that it was important not to “prejudge” the FCA’s work to adapt to its new secondary objective.

Alder told MPs that there would be “no presumption to disclose or to name” companies under investigation under the proposed regime.

FCA chief executive Nikhil Rathi told the committee that the regulator’s current framework allowed it to name companies under investigation only in “exceptional” circumstances. “Sadly, investment fraud is not exceptional,” he said. 

Following a consultation, which closed last week, Rathi said the regulator would take “several months” to consider the feedback it had received. 

Afolami, who last year called on the FCA to allow more risk-taking in the sectors it regulates, said on Wednesday its progress towards that objective was “mixed” and that its approach risked putting off overseas investors.

“Stop focusing on things that are non-core like naming and shaming, and this diversity consultation,” he said, referring to an FCA consultation on measures to boost diversity and inclusion at regulated companies.

“That sort of thing means that the signal to international investors . . . is that the regulator still doesn’t get it,” Afolami said.

Afolami also rejected concerns raised by former FCA chair Charles Randell that the government’s approach to regulating cryptocurrencies would bring “retail crypto speculation firmly into the mainstream”, even though fraud was “a feature, not a bug” of much of the industry. 

“We all want to tackle fraud, we recognise it’s a big problem. But frankly, there’s more than enough fraud in the traditional financial services sector,” the minister said.

“It’s arrogant to think that ordinary people won’t be able to make judgments,” he added, describing concerns about retail investors being duped as “really patronising”.

Western lender with largest operations in Russia decides to ‘walk away’ from deal after pressure from regulators

Austria’s Raiffeisen Bank International said it had decided to “walk away” from a deal involving holdings of sanctions-hit Russian oligarch Oleg Deripaska following pressure from regulators and western governments.

The lender, which is still operating in Russia, said on Wednesday it was no longer pursuing an asset swap plan announced in December involving Deripaska’s 25 per cent shareholding in the Austrian construction giant Strabag.

“In recent exchanges with the relevant authorities, RBI has been unable to obtain the required comfort in order to proceed with the proposed transaction,” the Vienna-based bank said.

It added: “In an abundance of caution, the bank has decided to walk away from the deal.”

Through a series of interrelated transactions and shifts in ownership, RBI hoped to acquire the Strabag shares owned by Deripaska in return for some of its assets in Russia. Raiffeisen is now the western bank with the largest presence in the country.

The bank has repeatedly insisted the transaction would not fall foul of sanctions restrictions on Deripaska, one of the first oligarchs friendly to Russian President Vladimir Putin to be hit by punitive economic measures in Europe after Moscow’s war in Ukraine.

RBI has come under increasing pressure from regulators and foreign governments after raking in profits from its Russia division as rivals pulled out in the wake of Moscow’s full-scale invasion of Ukraine in February 2022.

Its profits are however trapped in the country under legislation introduced by the Kremlin, and any attempt to sell its local business will require presidential authority and would likely involve a steep loss. The Deripaska deal was an attempt to repatriate earnings to its corporate headquarters in Austria.

RBI has shrunk its lending activity in Russia over the past two years but profits have been buoyed by fees on foreign exchange transactions and the spread the bank can earn between the low rate of interest it pays to depositors and the high rate paid by the Russian central bank.

Depositors have continued to flock to the Austrian lender in Russia despite its unattractive interest rates because of its perceived status as a western haven bank.

US authorities are now closely scrutinising RBI’s efforts to wind down and sell its Russian business. Last month, the bank also said it had been instructed by the European Central Bank to speed up its withdrawal from Russia, in a move it said could derail talks to sell its highly profitable division in the country.

The Financial Times reported in April week that Raiffeisen had been posting dozens of advertisements for Russia-based jobs indicating ambitious plans to grow in the country, in an apparent contradiction of its commitment to scale back operations.

The bank said the text of the advertisements was out of date and pledged to refresh them.