European stocks start timidly, Morrisons bidding war rages

Morning Note

A meek start to equity trading in Europe on Monday follows another record-breaking session for Wall Street on Friday. The Dow Jones and S&P 500 both rose to new all-time closing highs after a stellar jobs report indicated the US economy is purring, whilst a very strong earnings season has underpinned support for the broader market. Shares in London and Frankfurt were a tad lower though the Euro Stoxx 50 was steady, the dollar hit its strongest versus the euro in 4 months, oil prices were weaker, and gold declined sharply overnight.

Private equity raiders: Shares in Morrisons traded 0.5% higher at 280p after the Takeover Panel extended the deadline for CD&R to improve its offer for the grocer. The move comes after rival Fortress upped its offer to 270p plus a 2p special dividend, marking a total consideration of almost £10bn. The move by the regulator to give CD&R more time suggests this bidding war is not over yet. The group has until Aug 20th to make a final bid and we can expect that they will try to deliver a knockout bid by then. I think it was a month ago I suggested 280p would be required for a knockout and that is where shares trade this morning as investors expect just a little more juice to be squeezed from this. Meanwhile, Vectura shares rallied a further 2% to 167p after Philip Morris raised its offer to 165p after Carlyle’s recommended 155p offer on Friday.

A key leading indicator for the global economy is roaring higher. Chinese inflation topped estimates, as the official producer price index rose at a racy 9% in July from a year earlier, accelerating from the +8.8% in June. CPI rose at 1%, but it’s the Chinese PPI that is the important measure for investors looking at where global CPI will be heading in the coming months.

A very hot jobs report from the US on Friday has left investors expecting the Fed to taper earlier, with this month’s Jackson Hole symposium seen as the likely place for the central bank to lay out a timeline for reducing its support for the economy. The NFP report showed US employers added 943k jobs last month, beating forecasts, whilst unemployment fell to 5.4% and wage growth accelerated to 4%. Yields rose and Fed Funds futures steepened in the wake of the report and all eyes now focus on the CPI data this week. Core inflation is expected to moderate from 4.5% to 4.3% but this is no guarantee and another hotter-than-expected reading would leave the Fed nowhere to go except to taper. As ever we will be looking squarely at the core month-on-month reading to give a read on how transitory the inflation is. In addition to the CPI report there is a raft of Fed speakers slated for this week.

Gold sank sharply in the Asian session overnight as the momentum from Friday’s strong jobs report carried through the weekend and accelerated in an illiquid session with Japan and Singapore being closed for a holiday. Spot prices dropped to $1,684, just falling short of touching the March lows, but in the process breaking beneath longer-term trend support.

Gold price action chart on 9th August 2021.

Stocks slip, Morrisons up as bidding war intensifies, OPEC still stuck

Morning Note

European stocks slid early on Monday as they continue to run up and down well-worn ranges. On Friday, the S&P 500 rose for a 7th straight session and notched another all-time high after a strong jobs report. The nonfarm payrolls report indicated US employers added 850,000 jobs last month, the strongest number in 10 months and a sign that hiring is accelerating as pandemic-era support is scaled back. However, the unemployment rate rose to 5.9%, against expectations it would fall to 5.6%. In all this was a positive report for stocks, indicating solid-but-not-too-hot economic recovery and keeping the Fed on the course the market sees it on. Yields fell, with the 10-year back to its lowest since March, and the dollar eased back after being bid up all week. The soft finish last week for the dollar has continued into Monday but we should caution that the Independence Day holiday today, held over from yesterday, will keep US markets closed, and maybe keep equities from making any serious moves. Overnight Asian shares were steady as the Caixin services PMI fell to a14-month low. 

 

Bidding war intensifies: Morrisons shares leapt again after management said over the weekend they have accepted a £9.5bn offer from Fortress. The deal values the stock at 252p, a 42% premium to the undisturbed price, plus a 2p special dividend. Apollo Global Management said in a statement this morning that it is now considering an offer.  Shares this morning trade up 11% at 267p, reflecting a premium to the agreed bid that indicates investors believe there could be more juice to be squeezed from this particular bidding war. I think there could well be another offer or two and 280p might be seen before it’s a knockout. We’ve talked fairly regularly about the amount of private equity money there is waiting for UK companies, which are cheap vs peers. Given our interventionist chancellor wants to open up the listing process to make it more appealing to list in London, he may also want to consider ways to shore up the defences of public companies. When you look at UK valuations vs US and even European peers it’s still too cheap.

 

Talks among OPEC members and allies continue today after the cartel failed to reach agreement on a planned increase in production last week. The UAE remains the obstacle to the OPEC+ group raising output by an extra 400k bpd each month from August through to December, slowing turning on an extra 2m bpd by the end of the year. It would also extend the production agreement through to the end of 2022. The UAE, which threatened to leave OPEC last year, says it unconditionally supports a deal but is seeking better terms. Essentially it wants more share, saying that the original output deal no longer reflects the country’s production capacity. WTI for August trades above $75, with the market fundamentals apparently bullish whether there is a deal or not. An unusually sedate oil market around a drawn-out, disputed OPEC meeting tells you the market is tight and 400k bpd is not enough to right it. 

 

Solid run up in gold as yields came off but $1,800 remains obdurate defence. Watching potential bullish MACD crossover. TIPS are supportive with the 30yr inflation protected yield negative and at its lowest since February.

 

Chart showing gold performance with MACD crossovers highlighted.

Bitcoin futures holding under the 200-day SMA:

Bitcoin chart showing 200 day SMA.

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