UK and Europe
Some M&A fever offset a backdrop of disappointing corporate results and an ECB meeting hangover, leaving UK stocks ending flat on Friday.
The FTSE 100 is on course to finish a third week in a row above 7,000 but gains beyond the big figure are proving hard to come by.
Canadian rating agency DBRS reviewing its investment grade rating of Portuguese government debt has weighed on stocks in Europe’s periphery including Spain and Italy. Stock markets in Europe’s core including France and Germany were slightly higher, reflecting the higher credit rating of their respective country’s debt.
Burberry (LON:BRBY) shares topped the FTSE 100 on rumours it is working on a potential merger with Coach (NYSE:COH), the US luxury retailer famed for its handbags. Both firms have a strong foothold in China, where slowing demand has weighed on sales in the past couple of years, but have complimentary business models in the US and the UK.
Shares of British American Tobacco (LON:BATS) unwound earlier gains on reports it may reject an initial takeover offer for Reynolds American (NYSE:RAI). Shares of tobacco industry peer Imperial Brands (LON:IMB) maintained its gains on hopes of further consolidation in the sector.
BAT is to pay $47bn for the 57.8% of Reynolds that it doesn’t already own, a 20% premium. It is another effort within the tobacco industry to consolidate in the face of slowing demand in developed markets. Last year Reynolds bought Lorillard for $25bn. It’s no coincidence that the merger comes just months after the UK instituted plain packaging rules for cigarette packets. BAT’s large stake in Reynolds meant this merger was always on the cards.
Low interest rates won’t last forever so BAT’s chief executive Nicandro Durante has decided now was the time to make the move and take advantage of cheap financing. The $56.50 per share off is just above the record high for Reynolds shares reached in June, and given that no formal discussion have jet been had between management, could be rebuffed.
Shares of InterContinental Hotels (LON:IHG) were propping up the UK equity benchmark after reporting a fall in revenues in the third quarter.
US
US stocks slid in early trading with the Dow Jones losing 0.5% or 90 points at the open. The tech-heavy NASDAQ edged out small gains, benefitting from strong earnings overnight from Microsoft (NASDAQ:MSFT) and PayPal (NASDAQ:PYPL).
Merger talk is also at play in US markets with US-based Reynolds the subject of a BAT takeover approach and reports that AT&T (NYSE:T) was is discussion with Time Warner (NYSE:TWX) for a possible acquisition (NB: A deal was announced Saturday...AT&T will acquire the cable and publishing company for $85.4B).
Shares of McDonald’s (NYSE:MCD) rose after it reported higher than expected sales in the third quarter. Innovations under CEO Steve Easterbrook including the all-day breakfast and additive-free chicken nuggets helped a sales rise in the US. That more than offset lower sales in China because of a protest against the US-led decision on China’s south sea territories.
FX
The US dollar strengthened across the board on Friday, with the dollar index hitting an eight-month high.
A sharp slide in the Chinese yuan is now coming into sharper focus and the euro is suffering more ECB-induced selling. The dollar is the main counterparty so it rises as the yuan and euro fall. It is also a safe haven when risk assets drop over concerns about currency depreciation in China.
A little political strife at a summit involving UK and EU leaders has seen the British pound tick lower. UK Prime Minister May has objected to the UK ’rubber stamping’ decisions reached at meetings that UK representatives did not attend. Tensions were already flaring as that EU looks at another failed trade deal, this time with Canada.
The oil-sensitive Norwegian krone and Canadian dollar took the most punishment from a sharp slide in the price of oil since Thursday. Canadian retail sales missing estimates for September added to the declines in the CAD
Commodities
Oil prices stabilised on Friday with strength of the dollar and a bearish assessment of the impact of OPEC cutting output from the World Bank offset by short-covering after a big drop on Thursday.
Gold and silver prices were little changed.
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