In isolation the Amazon tie-in looks like a superb strategic opportunity for Morrisons. It gives the retailer significant online exposure to Amazon's which is especially valuable given how much it has lagged the competition in this channel in the past. However, we have heard this before and Morrisons' tie-in with Ocado, the other big name in UK online retail, was also announced two years ago with high expectations that have yet to reach fruition. 

That the Amazon deal comes in conjunction with a renegotiation of the Ocado deal highlights the complexity Morrisons faces in selling through two online suppliers who are in competition with one another. Speculation has also mounted over a potential Amazon takeover of Ocado in 2016, but with Amazon moving into physical retail in North America it could be that the pure player will ultimately seek to deepen its UK presence using Morrisons stores. This is a welcome show of support for Morrisons given the travails of the grocer in recent years.

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The rebound in stocks is just a reflection of the heightened volatility in equity markets since the start of the year. After falling sharply in the past few weeks, stocks are now responding to stronger oil and some positive news from select energy firms.

It is no sign of a real turnaround in the resources sector and the general picture is still pretty dire. Prices of most industrial metals remain near multiyear lows. Commodity markets are plagued by oversupply, as production capacity has been bolstered by a surge in investment during the boom years, while demand has weakened in line with China's economic slowdown. Producers' response to the current price slump will eventually halt the downward trend in prices, but we do not expect this to happen until much later into the year.

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The deal yesterday and the meeting today may mark the beginning of a fraught, protracted negotiation process within OPEC. Yet joint output cuts by both OPEC members and Russia remain a distant prospect.

The process is a smart strategy for Saudi Arabia. It shows that they are willing to collaborate and are not stubbornly sticking to their painful strategy of flooding the market to evict higher-cost producers. It shifts the burden of responsibility for refusing to cut production to arch-rival Iran. Finally, it maintains the status quo while talks are ongoing, thereby continuing to press US shale and other struggling oil producers outside of OPEC.

By stating that cutting output would be "illogical", Iran, for its part, has made its position clear ahead of the meeting, setting the bar high for negotiations. 

Even if a surprise agreement emerges, for instance by giving Iran a special status, it will do little to reduce the current imbalance in global oil markets. For Iraq, Russia and Saudi Arabia to "freeze" output at January levels means keeping pumping at record levels, at a time when demand is slowing in line with decelerating global economic growth.

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The decision to devote £1bn a year more to mental health services by 2020-21 is a welcome sign that this area of treatment is finally getting fuller recognition within the NHS. Not only are mental health services underfunded, but that underfunding actually pushes up costs elsewhere in the health system. Patients risk more complications, needing longer treatment, if their physical illnesses are compounded by mental health problems. Moreover, the knock-on effects for their employment, their families and their living conditions means that there are huge costs for society as a whole if mental health is not treated seriously. 

The taskforce has come up with a list of 58 areas where the new funding can be used, notably by expanding talking cures, early intervention and crisis care. Followed through, these are intended to bring down suicide rates by 10%, and may actually deliver some savings in areas such as emergency care.

The plans are ambitious, though, and rely on overcoming recruitment problems in order to deliver 24 hour services. Moreover, the £1bn a year – some of which actually comes from existing commitments – will have to fit into the overall NHS funding plan that calls for efficiency savings. There is also little discussion of how the funding increases will fit with the prolonged cuts in local authority budgets, particularly for social services that feed into mental health.

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The stand-off between the government and the British Medical Association is escalating, and it looks like neither side is prepared to back down. Part of the battle is over public opinion, and although the latest polls continue to show strong public support for doctors, opinion is polarising and government support is also rising. The government may gain further ground as the strikes start to make a serious impact on patient care, but BMA claims that Jeremy Hunt personally vetoed its cost-neutral offer in the negotiations may prove damaging to his case. 

As the negotiations get increasingly bad-tempered, the government needs to keep its sights set on its end-goal: improving patient care without busting the NHS's already stretched budget. There is some evidence that a full-time, 24/7 NHS would reduce patient mortality; it may even deliver some savings. But that has to be weighed against the risks of undermining doctors' morale and recruitment rates, as well as their relationship with the government and senior NHS management. There may be similar knock-on effects for other NHS staff, with some nurses protesting alongside the doctors.
 
The NH primary is unlikely to provide much clarity on either race. Bernie Sanders has long held a significant lead over Hillary Clinton; we expect him to win comfortably. But the Clinton machine will begin to assert its dominance at the next primary, in South Carolina. From then onwards, we expect Mr Sanders to find life tougher.

On the Republican side, Marco Rubio's impressive third place was the most consequential development in Iowa. But since then he has not helped himself with a poor performance during the weekend's debate; he crumpled under more concerted attacks from his direct rivals: Jeb Bush, Chris Christie and John Kasich. Establishment support will eventually coalesce around one of these men (most likely Rubio), but it will not happen immediately after NH. Donald Trump has led the polls in NH comfortably. He will be crossing his fingers for a clear win, after his disappointment in Iowa. We still think that establishment pressure will pay, and Mr Rubio will emerge as the Republican candidate in the months ahead.
 

None of the oil majors are being spared by the precipitous fall in oil prices since mid-2014. Shell's plunge in profits was particularly steep—from US$19bn to US$3.8bn—as it wrote down several assets in its upstream business, notably in the US shale sector, the Arctic and in Canadian oil sands.

The announced spending reductions—including reduced investment and some 10,000 job cuts—are only partly a result of this. They also form part of the company's broader strategy following its acquisition of the UK's BG Group, which will become effective this month. Although this purchase reinforces Shell's reserves position and will boost its market share in LNG, the hefty price paid requires some painful streamlining in the near term.

BP's full-year profits more than halve

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BP's financial results are in line with the trends of the past few quarters, with full year profits halving in 2015 as crude oil prices plunged by almost 50% from 2014. Like other majors, BP managed to offset losses in its upstream business with stronger performance in downstream, in part thanks to high refining margins.

On the operational front, BP's announcement is an indication of the increasingly difficult environment for crude producers. BP managed to increase oil production by 11% year on year in 2015, as new projects in Europe and the rest of the world more than offset a drop in output in the US. However, BP's share of liquids production in Rosneft, Russia's largest oil firm, fell marginally. Capital expenditure fell by one-fifth and only a handful of new projects were approved.

More pain can be expected this year: oil prices lurched downwards again this quarter, refining margins are falling and BP expects to further cut back on capital expenditure. All of this points to reduced production volumes and shrinking revenue.

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Tuesday, 02 February 2016

Sainsbury's offers £1.3bn for Argos

If successful this could be a brave and decisive move by Sainsbury's – allowing the retailer to diversify its appeal, repurpose its store space and simplify its own offering. In the medium term, this would create two retailers under one roof, one focusing on non-feed and the other on groceries.

If the £120m per year cost saving synergies touted by Sainsbury's are accurate, or conservative as the retailer claims, then the deal will effectively have paid for itself in little more than a decade.

However, there is a flip side to this. Argos has developed a strong multichannel offering but not one that necessarily lends itself to grocery delivery and the two retail subsectors are fairly divergent. Additionally, competition from Amazon remains strong and is expanding quickly while discount retailers, another significant market challenger to Sainsbury's, are thriving precisely because they are keeping things simple by focusing on what they do best.

Rather than creating a new avenue for sales Sainsbury's may find that it is simply opening itself up to a new front of competition.

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Kingfisher's announcement is in some ways an encouraging recognition of a number of disruptors that the business faces in the medium term. Not only is the growth in online sales likely to make greater inroads into the home retail market, but Kingfisher is also likely to see an intensification in competition following the takeover and upcoming re-branding of Homebase by Bunnings.

Enhancing its multichannel offering, especially via click and collect and smaller retail spaces is something that Kingfisher has pioneered well with Screwfix. It will be interesting to see how this translates into other business areas with larger spaces needed to facilitate the showrooming of packages like bathrooms and kitchens to customers.

In terms of price commitments, Kingfisher is operating from a position of strength given low oil prices and the potential to streamline the offline business. Nevertheless, the cost of significant restructuring could be problematic and a rise in oil or commodity prices could undermine the ability to deliver some price cuts.

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