SqlWorldWide - no, database watcher does not replace Audit and Diagnostic Settings for Azure SQL Database. Those features are generally available and continue to be fully supported. Database watcher is an opt-in monitoring solution for customers who require the capabilities it provides.
Alerting is a top planned capability as indicated in the roadmap section in the blog. At this time, we are not sharing a specific timeline though.
marcelode - at this time, we are focused on supporting the Azure SQL family of products in database watcher. We request that customers interested in the support for Arc-enabled SQL Server, or support for monitoring of any other database send us feedback, or vote and comment on a similar feedback item if it exists.