Fed fallout, Morrisons shares jump

The reverberations from the Fed’s policy meeting last week continue to be felt across global markets. Stocks have fallen, bond yields too, amid a sharp repricing of the risks of the Fed raising rates. Asian shares fell as global markets continue to react to the Fed’s willingness to raise rates in the face of higher inflation and its admission that members are talking about talking about tapering. US stocks suffered their worst week in several months, with the Dow Jones declining the most since October. European markets followed suit with a broad sell-off in early trade Monday. US 10yr yields have fallen below 1.4%, whilst the dollar is surging. The funny thing about all this is that given the data coming out of the US the Fed didn’t do anything terribly surprising, it just seems to have caught some by surprise by saying it wasn’t going to keep things super easy forever. Let’s be clear – this is not a shift away from average inflation targeting or somehow the Fed abandoning its employment-first approach: only a realisation that two and a half years from now the economy should be pretty well recovered, and inflation will have been running above 2% for a good amount of months, so some tightening would be warranted. Yields declining after a ‘hawkish’ Fed is frankly odd, and indicates the market thinks the stance is appropriate to keep a lid on inflation.

Shares in Morrisons jumped 30% to 234p after it said it rejected an informal offer from Clayton, Dubilier & Rice at 230p, saying that the bid undervalues the business. CD&R has until July 17th if it wants to make a formal offer, though this could flush Amazon out to finally make an approach. MRW has been undervalued for a while and before today not got nowhere near recovering its pre-pandemic valuation. Owning the bulk of its store estate outright makes it an attractive asset for private equity intent on gearing it up (think Toys R Us…). There is a lot of PE money sniffing around the UK as valuations are low – we knew this before the pandemic. But its market share of the UK grocery market, its growing wholesale business and its existing tie-up with Amazon surely means it is not impossible the US tech giant will make an offer. However, if Amazon were interested, you’d assume that an offer would have come by now. A PE bid seems more likely and ultimately may be the best way to unlock value for shareholders who’ve gone through a lot but ultimately not seen any appreciation in years (before today). Shares in Tesco and Sainsbury’s were up strongly partly on the read-across, partly on expectations that a PE buyout would see MRW less able/willing to compete.

This morning the FTSE 100 declined half of one percent to trade under 7,000 following from Friday’s drubbing on Wall Street that left the S&P 500 down 1.3% on the day and the Vix rose towards 22. As flagged last week, the UK market was liable to a pullback as it approached the top of the rising wedge.

Chart showing FTSE 100 movements on 21 June 2021.

Dollar looks stretched and liable to pullback but lots of speculative short USD/long EUR/GBP positions need to be unwound. This is a big dollar short squeeze.

21st June 2021's Dollar Index performance

Gold tested $1,760 where it has found some near-term support, but it’s going to be tough to avoid a flirt with $1,675.

Gold performance 21.06.2021.