UK and Europe
Stocks in Europe got off to a good start to the week with the German DAX index touching its highest level this year. The FTSE 100 leaped above the highs reached last week, only to fall back, leaving it lower on the day.
The healthcare sector was a drag on the UK share index lower since the regulatory scrutiny of Syngenta’s takeover by ChemChina lowers the chance of success for German pharmaceutical firm Bayer (DE:BAYGN) acquiring Monsanto (NYSE:MON).
Stocks in the Eurozone were supported by an improvement in economic activity during October according to purchasing manager surveys. The Markit Eurozone composite PMI rose to 53.7 in October from 52.6, exceeding estimates of a rise to 52.8. The gains come largely as a bounce back in Germany’s service sector.
Shares of Syngenta slumped 9% on fears the European Commission could move to block its takeover by ChemChina. It comes a day ahead of Q3 earnings released tomorrow. The EC said Syngenta has offered no concessions to competition concerns over the takeover. It looks like a shot across the bow right before earnings from increasingly interventionist Europe regulators who have already taken aim at US tech firms Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) this year.
Shares of French Connection popped 19% on takeover speculation. US firms and private equity are said to be circling the troubled UK fashion company in the hopes of spurring a turnaround. The speculation comes a week after UK clothing retailers ASOS (LON:ASOS) and Burberry raised profit forecasts, mostly thanks to the fall in the value of the pound boosting foreign earnings. UK Plc is still very much in vogue in fashion circles abroad, especially in Asia. With the right investment, French Connection could be well placed to take advantage of a lower Sterling.
US
Stocks in the US had a stronger start with the tech-heavy Nasdaq leading the charge at the start of a week full of tech company earnings, starting with Apple tomorrow.
If the Bangles could describe it, it was another Mega media merger Monday.
Shares of telecoms giant AT&T dropped after it announced it will buy media company Time Warner for $85.4bn. The US government, including both Presidential candidates have not come out in favour of AT&T’s proposed takeover of Time Warner. Consolidation in media and communications is rightly a competition concern but politicians seem to be unaware that content is king, and streaming companies like Netflix (NASDAQ:NFLX) – and Time Warner’s HBO are a big threat to cable/wireless providers. AT&T doesn’t just want the network; it wants the content for the network.
The world of online trading moved one step towards fewer players on Monday as two of America’s biggest firms, Ameritradeand Scottrade agreed to merge. Ameritrade will buy Scottrade for $4bn.
FX
The increasingly crash-like price action of the Chinese yuan unnerved the FX market on Monday. The offshore yuan fell back to near its lowest on record after the People’s Bank of China fixed the onshore rate at its weakest against the dollar in six years.
China’s economy has softened in the last few years so its Communist government has had to become increasingly active to hit its own economic growth targets. One way China can keep its economy ticking over is by having the central bank, the People’s Bank of China, cut interest rates. By contrast, the US Federal Reserve is expected to raise rates in December this year, which is creating demand for dollars. The expectation of lower interest rates prompts investors to move their money into other currencies where interest rates are expected to rise.
This policy divergence between the US and Chinese central banks is causing funds to flow out of China and into the US. A net $44.7 billion worth of yuan payments left China last month, the most since records started in 2010.
The reason China’s currency is depreciating so fast is because it is unwinding years of unwarranted appreciation. While the currencies of other major economies like Europe and Japan have fallen because of ultra-loose monetary policy, the Chinese yuan rose because it is pegged to the US dollar. Exports account for a large part of China’s economic growth and they have been falling because China has lost competiveness in price due to its exchange rate. It is in the Chinese government’s best interest to let the yuan lose value to increase the competitiveness of its exports.
The rest of the forex market was dead as a doornail on Monday. Mildly hawkish comments from the Fed’s James Bullard gave the dollar a nudge against most major currencies.
Positive Eurozone PMIs had little bearing on the euro with sentiment dominated by the prospect of more monetary easing from the ECB.
Commodities
The price of oil dropped on Monday, taking Brent crude back to the bottom of its recent price range. Iraq, one of OPEC’s largest producers, saying it should be exempt from cutting oil output whilst it deals with a war against Islamic militants has dampened prospects that the cartel can reach agreement over how the planned cut will be distributed. It’s becoming increasingly clear that Saudi Arabia, along with the UAE and Kuwait will have to shoulder most of the output cut for it to have any chance of happening.
The price of gold was volatile as traders grappled with major price support at $1250 per oz and the rising odds of a US rate rise this year.
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