Europe
It’s been a day for some pause after yesterday’s strong gains, with European markets slipping back ahead of the release of tonight’s minutes from the most recent Federal Reserve rate meeting.
While European markets have broadly slipped back the FTSE100 was only able to outperform slightly despite this morning’s boost from the Royal Dutch Shell (LONDON:RDSa) M&A story.
The UK benchmark has once again had a tilt at the 7,000 level today propelled there by Shell’s £47bn bid for sector peer BG Group (LONDON:BG), with the rest of the sector catching a tailwind as a result; but once again the FTSE has struggled to maintain a foothold above this psychologically important level.
BP (LONDON:BP) shares also pushed higher on speculation that it could well become a target itself for a much bigger rival; with some touting US oil giant ExxonMobil as a possible candidate, however the prospective price tag could well be too large given BP’s current market cap of £85bn.
Coming on the back of yesterday’s FedEx/TNT deal it appears that M&A is returning with a vengeance as companies look to grow by acquisition, as opposed to growing organically by way of increasing R&D and capital expenditure.
This sort of activity begs the question as to who will be next and probably more importantly in what sector, as the low interest rate environment further fuels risk taking and the search for yield.
While the oil sector as a whole has got a wider boost, Royal Dutch Shell’s shares have slipped back, as a result of some caution that the company could well be overpaying for BG Group’s assets.
Shell’s estimates appear to be predicated on an oil price well above current levels, and there is the risk that a prolonged period of low oil and gas prices could mean that the benefits of this acquisition take some years to accrue, hence today’s share price slide.
Given the paucity of returns another sector ripe for consolidation could be the mining sector, particularly in light of the chatter earlier this week about Glencore (LONDON:GLEN) and Rio Tinto (LONDON:RIO).
While this looks like a long shot and could well run into a regulatory brick wall in the form of the Australian government it nonetheless speaks to a wider truth that falling commodity prices could well prompt consolidation in the mining sector with eyes likely to be on Rio Tinto and BHP, in the same way we’ve seen in the oil and gas sector in recent months.
We’ve already seen US oilfield services provider Halliburton Company (NYSE:HAL) pay up for sector peer Baker Hughes, and with central banks unlikely to raise rates anytime soon we could well see some further big deals in the coming weeks and months, in both the oil and gas sector and the mining sector.
US
US markets opened slightly higher today ahead of the official kick off of earnings season which starts after the close tonight with the release of Alcoa’s latest numbers.
Before that though we get the release of the latest FOMC minutes which could well offer an insight into the Fed’s thinking behind last month's decision to drop "patience", from the guidance language, while at the same time revising down their growth and inflation forecasts.
While Fed officials have been reluctant publicly to cite the rise in the US Dollar as a factor in the recent data slowdown, tonight’s minutes could suggest that they are more concerned about it than they have currently admitted.
This could be important in the context of last week’s disappointing payrolls numbers, and could well cause markets to push back expectations of the timing of a possible rate rise.
FX
The US dollar has slid back ahead of tonight’s FOMC minutes, losing ground in particular against the Australian dollar after this week’s decision by the RBA to leave rates unchanged. The likelihood is that tonight’s minutes could well be more dovish than expected and we could well get some extra colour on what effect the stronger US dollar had on policymakers decisions to cut their growth and inflation forecasts for the US economy, at last month’s meeting.
The pound has also rallied after struggling yesterday, despite positive economic data, driven higher by this morning’s M&A news from the oil and gas sector.
Other decent gainers have been in the commodity space with the Norwegian Krone and Canadian dollar gaining some ground in the wake of the gain seen in the oil price in the last couple of days.
Commodities
Oil prices have struggled to maintain the gains of the last couple of days drifting back off their recent highs ahead of some key US inventory data, which once again showed a significant build in inventories of 10.9m barrels, well above expectations of a 3.4m build.
The recent volatility looks set to continue with Brent prices finding a natural ceiling just above $60 a barrel and WTI finding a ceiling just above $53 a barrel which we last saw in February this year. Unless we see significant production cuts in the short to medium term it’s hard to argue for a sustained case for oil prices above these recent highs in the short term.
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