8 May 2018

Of May and Mergers

Trading weeks starting with a multi-billion pound takeover are not that common. The news that Sainsbury is to shake up the supermarket world caught everyone by surprise.

One senior retail boss remarked to a journalist that, learning of the deal, he had trouble scraping his chin off the floor. This unexpected development helped lift shares in London despite indifferent conditions over in the US. But then there’s nothing like a little merger and acquisition activity to lift the spirits of investors.

Sainsbury’s boss, meantime, was caught on camera singing “We’re in the money” softly to himself, much to his subsequent discomfort. Only time will tell if his optimism is well founded, but there is no doubt that supermarkets are overdue a shake-up, given the inroads being made by the likes of Lidl and Aldi and the growing power of internet retailers, like Amazon. Anyway, we need a little boost as the news elsewhere is somewhat mixed.

In America the corporate reporting season has seen few surprises and has generally posted above expectation profits growth, though there is evidence to suggest that the global economic recovery is slowing a little. Perhaps that is why China has loosened monetary policy, though recent numbers from the world’s second largest economy suggests growth is on track. It is the threat of a trade war that is making the likes of the IMF cautious over the future, though even that seems to be on hold, for the time being at least.

There are signs that the new boss of America’s Federal Reserve Bank is likely to adopt a more hawkish stance to monetary policy than his predecessor, Janet Yellen. With a statement from the Fed due imminently, we may know more by the time you read this. Certainly, markets are factoring in three further rate rises this year, while here at home expectations of interest rate increases are diminishing. We’ll learn soon enough if the Bank of England is truly concerned over recent sluggish economic data.

There is a little more excitement in foreign exchange markets, with the dollar strengthening and sterling losing ground. Much of the recent movement in equity markets can be attributed to these factors, though in truth the readjustment in exchange rates has hardly been dramatic. Still, a weaker pound helps both our exporters and the international bias of our benchmark index, just as the recent strength of the dollar must be weighing on US markets. Hopefully calmness should prevail, though it is May – and you know what they say about this capricious month.

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