While weekend events in Lima at the IMF annual meetings focussed on the risks to the global economy, last week’s rebound in equity markets would appear to suggest that investors are for now, fairly sanguine about these risks, though emerging markets remain a cause for concern.
Coming off the back of one of the strongest weeks for equity markets this year, European stocks look set for a modest start to the week, as investors look towards a pickup in the number of US companies reporting their latest numbers for the recent quarter, as well as a host of CPI inflation numbers in the coming days, from the UK, China, US and Europe.
Last weeks Fed minutes came across as more dovish than had been expected given how close last month’s decision to keep rates on hold was supposed to have been. Given that since then we’ve seen much weaker data in the weeks since that meeting, it stands to reason that Fed policymakers are much less likely to be keen to tighten policy in the immediate future, irrespective of what they might say publicly, in terms of keeping a 2015 rate rise on the table. The minutes also highlighted concerns about the weakening outlook from the declines in commodity prices and a slowdown in China.
The resultant weakening of the US Dollar appears to reflect this belief with this week’s inflation data from the US unlikely to alter this perception, given that several members of the FOMC expressed concern that lower than expected inflation could persist and diminish any upticks in prices in the near term.
The weaker US dollar also prompted a strong rebound in commodity prices last week, which in turn gave a number of mining and energy stocks a long overdue reprieve from the recent downward pressure in their share prices.
Whether last week’s gains in crude oil prices proves to be sustainable remains open to question and this could well limit any further upside, particularly if this week’s latest Chinese data shows no signs of an improvement, with the release of the latest CPI and trade data for September, over the next two days.
Away from concerns about emerging markets growth M&A is one area where activity continues to generate some interest with the focus remaining on the bid by the world’s number one brewer, Anheuser-Busch Inbev SA (L:0O1Z) for SABMiller (L:SAB) for the eye wateringly high sum of $110bn.
While SABMiller did turn down last week’s bid, expectations are that we could see a higher offer come in before the Takeover panel’s Wednesday deadline, as some SABMiller shareholders pressure management to engage with AB InBev in order to come to a deal.
The prospect of a deal that brings together SABMiller, as the world’s second biggest brewer behind ABInBev with a market cap of £47.8bn, is notable for the fact that both companies are undergoing significant challenges with respect to their abilities to grow their revenues and profits.
While a tie-up between the companies would create a brewer that would dwarf its nearest competitors Heineken and Carlsberg (CO:CARLa), it is likely to come at some regulatory cost where there is overlap in the US China and Europe, and while cutting out overlapping costs between the two businesses will save money in the short term in the form of efficiencies, it won't solve longer term problems of products that aren't really that much different in terms of taste.
We’re already seeing that consumer tastes are changing along the lines of craft beers, wine, spirits, and away from mass produced beer, and it is not immediately clear how any deal would address this particular problem of changing consumer drinking habits and in that context it really doesn’t make sense to spend over $100bn on more of the same, except to line the pockets of the banks and large shareholders.
EURUSD – the euro has continued to build support above the 50/100 and 200 day MA’s at 1.1150, but really needs to push beyond the September high at 1.1470 to suggest a return to the 1.1700 level seen briefly in August. Support is expected to come in at the 1.1220 level
GBPUSD – last week’s rally to 1.5380 was a welcome sign that we may have seen a short term base for the pound. Ideally we need to see a move beyond the 1.5425 area to argue for a return to the September highs at 1.5630. Pullbacks need to stay above the 1.5220 area to reassure or we could slip back towards the lows this month at 1.5110.
EURGBP – continues to fins progress difficult beyond the 0.7430 area. We need to see a move beyond the May highs at 0.7485 to suggest further progress to the upside. There appears to be solid support at last week’s low at 0.7330.
USDJPY – remains uninspiring with resistance near the range highs of the past few weeks around the 121.00 area. Support remains at the recent range lows just below 118.80. We need a break of these levels to suggest a direction for the next move with a move towards 116.00 the preferred direction.
Equity market calls
FTSE100 is expected to open 18 points lower at 6,398
DAX is expected to open 24 points higher at 10,120
CAC40 is expected to open unchanged at 4,701
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