Focus has again shifted to the European bond markets and the thorny relationship between Italy and its European partners. With rumours that a Brexit deal could be only a couple of weeks away, traders have begun to see the Italian situation as potentially more problematic than the British one.
Italy’s new coalition government seems to be taking a page out of the Donald Trump playbook and issuing hysterical statements as part of a legitimate negotiating ploy. Joint deputy prime minister Matteo Salvini has been attacking EU officials and speculators today, accusing them f undermining Italy’s economy even as his government seeks to come to some agreement on its budget with Brussels. The reality is that countries within the eurozone do not have as much financial independence as those outside the bloc, but this rankles with Italy which has seen its borrowing costs soar to four-year highs.
Salvini accused speculators of taking advantage of the debacle by hinting that the country might reconsider its membership of the Euro. Italian government bonds were already 25 basis points above Friday’s yields as European markets opened. The Euro responded predictably and sold off towards the 1.15 level against the USD.
Automotive fears weigh on Melrose
Melrose (LON:MRON) Industries was the leading major stock in the red this afternoon, down over 5% on the day. The company had just announced the appointment of Liam Butterworth as head of its automotive division, but other worries prevailed, highlighted by Barclays (LON:BARC) which has started covering the stock again after the acquisition of GKN (LON:GKN). Melrose is being seen as a positive long-term investment by Barclays, but it is an engineering turnaround specialist, and Butterworth’s appointment means new leadership in its automotive division, an area of the market which many traders are bearish about right now.
In other news RPC, a FTSE 250 stock specialising in plastic packaging, bounced back, hurting many traders who had favoured it as a short target. This occurred on news that the company was in acquisition talks with Bain Capital and Apollo Global Management, although at this stage nothing has been confirmed. Even so, the talks in themselves were enough to send RPC to a six-month high of 780.
Aston Martin – IPO price was unrealistic
Aston Martin (LON:AML) shares are sliding again largely due to the level at which they were initially priced. The company listed shares that came out of a reserve of existing stock – i.e. owned by private shareholders. The free float was relatively limited and the company’s management team has said that they plan to keep debt down.
This should all be good news for Aston Martin, which has also benefited from strong interest in its luxury brand. The quality of the product can play a big role in IPOs of this kind, as it will reflect on the shares.
The big question is the way the stock was priced in the IPO – there was enthusiasm and demand for it initially, but comparisons will be made against competitor Ferrari (NYSE:RACE), which was listed in New York in 2015. Based on Ferrari’s last reported net profit, the sports car manufacturer is trading at a PE of 46x. The high price asked for Aston Martin stock has meant that its PE ratio is still looking much higher than Ferrari’s and some investors are asking themselves whether it is worth it. On top of that are concerns that Aston Martin has filed for bankruptcy seven times.
Overall the automotive industry is facing some big question marks at the moment – sales of some marquee car brands in the UK – e.g. Range Rover – are well down on 2017 as consumers defer car purchases ahead of Brexit – and big-name luxury brands are considered particularly vulnerable. Aston Martin still sells well abroad, but buyers of the stock at IPO are facing a considerable retracement as the shares descend to levels that look more realistic to conservative buyers.
Ensco and Rowan to merge
Ensco (NYSE:ESV) and Rowan (NYSE:RDC) have agreed what they are calling an all stock merger agreement that is going to create one of the largest fleets of drilling rigs in the world with an estimated 82 rigs on the fleet. Shareholders in Rowan will be receiving 2.215 Ensco shares for each Rowan share and will end up with 39% of the combined entity. With more than 35 customers and rigs all over the planet, the combined entity will carry considerable weight in the offshore drilling market. The merger comes as the sector continues to consolidate – just a month ago Ensco rival Transocean said it would be buying Ocean Rig in a $2.7 billion transaction and only last year Ensco itself completed a merger with Atwood Oceanics.
The new merger can be seen in the light of these deals – while a lower oil price had been making it harder for smaller companies to operate in this space, the costs of operation of deep water drilling rigs in particular have been going up as companies have been asked to operate fields at deeper depths. This is driving smaller operators out of the market, or to merge with larger partners.
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