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Smurfit Plunges on WestRock Takeover


Europe Mixed; Smurfit Kappa Bets Big

A mixed start to trade in Europe this morning, with the DAX and CAC sliding around 0.3% and the FTSE 100 up half a percent and holding gains north of 7,500 after making steady progress yesterday off the back of mining stocks. Some rotation taking place with basic resources and energy giving back a bit today, whilst defensives like healthcare and telecoms are picking up some bid having slipped yesterday on a more risk-on trade. 

Smurfit Kappa tumbled on news it would take over US peer’s been dubbed a merger but check the share price reaction: WestRock +8.6% pre-mkt and SKG –10% at the open in London. Cyclical business, nursing losses from the pandemic packaging boom, needs scale, longer term SKG investors may not be so downbeat. Repackaged as Smurfit WestRock, the new business has combined revenues of $34bn and about 20% market share in Europe and North America. SKG gets costs savings of about $400mn and not much overlap in terms of operations, with the deal said to be “high single digit accretive” to earnings per share, rising to ~20% after the first year. And it plays into the ongoing problems facing London’s best companies and the drip-drip loss to Wall Street - a shift to a New York listing should see a rerating – US peers trade on a higher multiple in general – WestRock is the cheapest thanks to some hefty debt. It may be a timely move by SKG underlines the problems facing London’s valuation crisis.

UK Economic Update: Job Market and Currency Fluctuations

UK claimant count change – last time we had signs of a cooling labour market but persistently strong wage growth and it’s the same today. The unemployment rate to 4.3% from 4.2%, wages up at a record 7.8% again. This is not the kind of wage-price-spiral environment the Bank of England will be too happy about. Meanwhile grocery price inflation in Britain has fallen to its lowest in a year. GBPUSD slipped back under 1.2480 as the dollar caught some bid early doors at 8am – EURUSD also falling but both trimming losses as the session progressed.


Global Watch: Yield Movements and Stock Surprises

Elsewhere, Treasury yields slipped a touch with the 10yr moving further below 4.30% to 4.270%, crude oil trades a shade under last week’s multi-month highs and made gains in early European trade to take WTI (Oct) back to almost $88, gold trades weaker, testing the 200-day SMA at $1,920. US stocks rallied strongly on Monday with Tesla popping 10% on an upgrade from Morgan Stanley, whilst Qualcomm rose almost 4% after the chipmaker said it would provide Apple with 5G modems for its iPhones.  Market seems to be confident the Fed is down but inflation data this week from the US is coming up – only a red hot reading would worry bulls.

Arm is closing its book early ahead of the IPO with reports it’s as much as 10x oversubscribed...healthy demand for a company seeking a valuation well above peers...everyone needs Arm tech but can it sustain that kind of valuation? Lots of forced buyers who would have had to enter at almost any price it seems. 

Apple product launch incoming – new phone, new charger...start of a new upgrade supercycle? Citigroup stuck with its buy rating on Apple (AAPL) ahead of the product event, reiterating a $240-per-share price target on the stock. Apple is likely to introduce the new iPhone 15 at the event, which Citi predicts will serve as a "strong replacement cycle". Apple may also reveal new Apple Watch models, including an updated version of the high-end Apple Watch Ultra. Shares have taken a bit of a hit in recent days on the China ban story...perhaps a bit of a pullback for bulls to enjoy but shares tend to fall on the days of product events.


Tesla Etcetera

On Tesla – this MS upgrade is BS. It’s a non-existent business line … nothing but magic fairy dust. Analyst Adam Jonas and co write: 

We believe that Dojo can add up to $500bn to Tesla's enterprise value, expressed through a faster adoption rate in Mobility (robotaxi) and Network Services (SaaS). The change drives our PT increase to $400 vs. $250 previously. We upgrade to Overweight and make Tesla our Top Pick.

What is Dojo? Dojo is a purpose-built supercomputer designed in-house by Tesla to train the full-self-driving (FSD) system that sits inside every Tesla vehicle.

It was only in June that Jonas downgraded the stock saying the market was dreaming about AI prematurely. For those who are still waiting for the robotaxis and FSD to appear, this upgrade from $250 to $400 based solely on a product that does not and may never exist looks a tad optimistic...dilutive capital raise incoming with MS running the books? Who knows...stranger things have happened. Remember in 2016 Goldman analysts upgraded the stock from neutral to buy – only for the company to announce a $2bn capital raise hours later in an equity offering underwritten by – yes – Goldman!


Goldman meme.png


Market Analysis: From BofA Survey to Commodities

BofA September Global Fund Manager Survey: “Investor sentiment no longer extreme bearish (17-month high in global equity allocation), but not yet bullish (FMS cash level up to 4.9%); more dramatic shift in relative exposure: record jump in US, record fall in EM equities as China growth optimism slumps back to "lockdown lows". 

The share of US households reporting that it's harder to obtain credit than one year ago hit a new high in the New York Fed's consumer survey. Meanwhile year-ahead inflation expectations ticked up, though on the 3-year horizon it fell.

inflation expectations


FX – dollar gains some footing, USDJPY holds the trend line and 23.6% retracement at 146.40 area after briefly testing a 145 handle yesterday.
USDJPY holds the trend line.png

Spot WTI – bull flag?
Spot WTI – bull flag


Gold – 1hr (LHS) showing higher lows since hitting $1,915 support; daily (RHS) showing potential bearish MACD and possible crack off the 200-day.
Gold – 1hr (LHS) showing higher lows.png


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