UK and Europe
The week has begun with a profusion of risk aversion across markets. A cagey attitude to taking risk is present in nearly every asset class. Global bond yields have hit new record lows, stock prices fell and the Japanese yen and gold were in demand. Stocks pulled off the lows of the day helped in part by a late bounce in crude oil.
Weak economic data from China and a corresponding devaluation of the Chinese currency appear to be the main drivers for investors shirking risk. Data released on Monday showed growth in Chinese industrial production and retail sales near the lowest levels in a decade. Matching the selling in offshore centres, the PBOC set the yuan fix lower by two handles and back towards five-year lows.
A fear is that the drop in bond yields is a tocsin of recession. Markets are rattled ahead of this week’s central bank meetings from the Federal Reserve, Bank of England and the Bank of Japan. The concern is present despite no change in policy being expected. That a pickup in global growth remains so allusive after seven years of easy monetary policy is increasingly concerning.
Banks are taking the brunt of the selling on the FTSE 100 as Brexit concerns mount. Shares of Lloyds (LON:LLOY) fell nearly 2% of investors fretted over low interest rates and the bank’s high exposure to the UK economy were there a Brexit. There appears to be a decisive shift in sentiment towards Germany’s Deutsche Bank (DE:DBKGn), which broke down to its lowest levels since February. Outsourcing company Capita (LON:CPI) is lower in a read-across from the selling in G4S (CO:G4S) shares.
G4S was amongst the biggest mid-cap fallers after it emerged the security services company employed the man responsible for America’s worst mass shooting in history. There is always an element of knee-jerk, headline-driven selling in these kinds of circumstances, but the shooting in Orlando could open up a can of worms for G4S.
That G4S has employed a man who’s reportedly been investigated by the FBI three times, once for alleging terrorist ties to co-workers doesn’t reflect well at all on the company’s business practices. G4S has more than 50,000 employees in the US, a large proportion of which are involved in government contracts. If the name of G4S starts getting dragged through the mud, US contracts may become harder to come by. That would be a serious hit to the company’s bottom line.
US
US stocks were flat in early trading after Microsoft’s acquisition of LinkedIn (NYSE:LNKD) created some much needed M&A-induced optimism. The flat open saw stocks recover an early sell-off in equity futures following weak data out of China and concerns over Brexit.
Shares of LinkedIn surged 48% on the open after Microsoft (NASDAQ:MSFT) announced it would purchase the social network in an all-cash transaction for $196 per share totaling $26bn. Shares of LinkedIn have completely recovered the sharp sell-off that ensued after it offered a weak outlook in its February earnings call.
Shares of Microsoft were 2% lower in early trading. Microsoft are paying 91x forward earnings, which needs some impressive growth in LinkedIn or cross-over benefits to Microsoft’s services to justify. Microsoft is increasingly moving into the cloud and this acquisition of LinkedIn is the next stage of that evolution. In this deal, Microsoft is acquiring the one thing that many of the new tech companies have and old-tech don’t; users. Microsoft will be hoping to lean on LinkedIn’s business users for its enterprise business. LinkedIn users can expected some options to integrate with Office 365 in the not-too-distant future.
FX
The US dollar was broadly weaker on Monday ahead of Wednesday’s Fed meeting. The yen was the biggest gainer as investors sought safe-havens whilst the British pound unwound early losses.
The increased chance of a Brexit vote after more polls showed a lead for leave hurt sterling, which slid for a fourth day, hitting a fresh two-month low against the dollar, before rallying off the lows.
Uncertainty over the future of ‘Abenomics’ as Japan’s economy wobbles is seeing investors sell Japanese stocks but is slightly more counter-intuitively creating demand for the Japanese yen. If Abenomics, which in part involves very loose monetary policy, gets rolled back, that’s yen-positive.
Commodities
Crude oil futures reversed early losses, tracking a later surge in risk-on sentiment. However, oil fundamentals are looking a bit shakier both from the demand and supply side. China’s growth outlook looks shaky at best whilst the US rig count rose for a 2nd weak and Iran is boosting production. The rise in the rig count is an early indicator that locked-out US shale producers are starting to drill again as the oil prices recovers.
The price of gold jumped for a fourth day on the trot as fears before this week’s Fed meeting created demand for alternative money.
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