SCOREBOARD: Big deal

As European growth contracted, mammoth M&A news failed to significantly brighten Wall Street's day.

We’re looking at a fairly sluggish session on Wall Street at the mo’ – very sluggish when you consider all the news flow. For starters there’s all the news about mega mergers. Warren Buffett, along with a private equity firm, has made a $28 billion offer for Heinz. That stock is up 20 per cent.

But there’s more! American Airlines and US Airways also announced they will merge, to form the world’s largest airline valued at something like $11 billion. Plenty of people have been expecting a pick-up in M&A, some even predicting a boom, so this news should be very positive. Certainly as risk appetite lifts, deals like this, though maybe not of the same size, will become more common.

Then on the macro front, initial jobless claims fell to 341,000 in the week to February 9, down from 368,000. Great, right? You’d think so, but as I write, with an hour or so to go, US stocks are mixed around zero (S&P500 0.1 per cent to 1521, Dow -9 points to 13,973 and Nasdaq 0.1 per cent to 3200).

Whether it’s news of the sequester or Europe I really don’t know – it’s not like either is new. The ‘sequester’ is the new term for the fiscal cliff. Unless legislation is passed to avoid it, automatic spending cuts of $85 billion per month kick in in about one and a half weeks – increasing to $110 billion after September 30. So far, the Republicans' position is that they won’t introduce legislation in the house to avoid it – that would be up to the Senate.

As for Europe well, you know, they’ve paid a heavy price for the approach they took to the crisis. It has cost them a lot in terms of growth and confidence, which as I argued at the time was needless, as there was an easier path. But here we are. In any case, European GDP contracted 0.6 per cent in the fourth quarter of last year (-0.4 per cent expected), following a 0.1 per cent fall in the September quarter, which leaves an annual rate of -0.9 per cent.GDP declined in all the major economies. In Greece the unemployment rate shot up to 27 per cent from 26.6 per cent, with youth unemployment at 61.7 per cent. Fair enough then that equities here slipped – the Dax was down 1 per cent, the CaC off 0.7 per cent and the FTSE 0.5 per cent lower. The best bet is that we’ve passed a trough there though, and growth should steadily pick up as the year progresses. I guess if there is one positive out of this, it’s that Italian and Spanish bond yields didn’t surge – indeed they were pretty much unchanged at 4.34 per cent and 5.17 per cent respectively. The euro was off a big figure after the results though and sits at 1.3343.

As for rates elsewhere, US Treasury yields fell after a good auction of 30 year bonds which went out at a yield of 3.18 per cent – the highest since April 2012. But demand was solid. Elsewhere on the curve, the 19-year yields fell 5 bps to 2.005 per cent. The 5-year is at 0.86 per cent, or down 4 bps, while the 2-year is at 0.27 per cent. Aussie futures followed suit, rallying 4.5-5 ticks with the 3s at 97.14 and the 10s at 96.48.

Finally for the price action, forex moves elsewhere saw the Australian dollar little changed at 1.0355; the British pound was about 2 5pips lower at 1.5490 and the yen fell to 93 from 93.49. Not much action in commodities either – gold was $9 weaker at $1635, copper flat and crude 0.4 per cent higher (WTI) to $97.41.

For our market today, the SPI suggests it should be quiet, with that index off 9 points to 4985. Then the calendar shows that there is no data for Australia and not much else around the region of note. Maybe a flash business sentiment indicator out of China – it's flash after all.

Tonight we get some words of wisdom and sage advice from the Group of 20. UK retail sales are also out and for the US, industrial production, the empire manufacturing index and Michigan University’s consumer confidence number for February.

Have a great weekend...

Adam Carr is a leading market economist.

See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

Related Articles