M&A in focus as PSA looks to Fiat merger, FOMC in focus

M&A in focus as PSA looks to Fiat merger, FOMC in focus

European markets opened modestly lower this morning ahead of what is likely to be yet another widely anticipated 25 basis point rate cut by the US Federal Reserve later today.

It is scarcely believable that with the S&P500 at record highs, and the US economy growing at a rate just below 2% and US unemployment close to a 50 year low, that we are looking at a US central bank that is set to cut rates for the third meeting in succession.

It is no secret that President Trump wants US policymakers to cut harder and faster, yet the data doesn’t really support such an extreme course of action and there are a number on the committee who remain opposed to rate cuts as can be seen from recent dissents to the last two rate reductions. 

Despite these splits investors seem convinced that the Fed will act today largely as a result of recent weakness in some of the more recent ISM and confidence surveys. There has been a lot of speculation about how the Fed will message a move on rates today in terms of its guidance for the rest of the year given that recent comments from Fed chair Jay Powell gave little indication that the Fed was inclined to move this month, and the dot plots showed no indication at all of further cuts this year.

The Fed certainly has questions to answer vis-à-vis its independence given the vocal nature of President Trumps recent interventions They would be perfectly within their rights to push back on this perception by keeping rates unchanged, while addressing the issues around recent tightness in short term rates markets, which has prompted concerns that US monetary policy is too tight. Interest rate policy isn’t the only game in town, and maybe it’s time for the US central bank to look at other measures to keep the US economy on track. Against this backdrop and the potential for further splits on the committee it wouldn’t be a surprise if the Fed disappoints and adopts a wait and see approach. Let’s not forget that we had a three way split at the last meeting in September

Just before the Fed meeting we also have the small matter of the latest Bank of Canada rate meeting. In some respects, the Bank of Canada probably wishes its meeting was after the US Federal Reserve’s, which is later in the day, so that if it needs to react to another US rate cut it can reserve the right to do so. Unfortunately for the BoC though, its meeting is four hours earlier, which means it will be meeting blind.  However, the Canadian economy seems to be performing quite well, so there is minimal risk in waiting to see what the Fed does this month and reacting at its next meeting.

The pound has remained steady despite the prospect of a highly unpredictable election, now set to take place on December 12th. While expectations are high that we could see the Conservatives win a majority, as we know from 2017 the eventual outcome is likely to be unpredictable. Party loyalties no longer matter as much as to whether you voted leave or remain, and the prospect of another hung parliament, or a Labour government is still a significant risk in what is a highly volatile political climate. Against that backdrop and changes in the opinion polls the pound is likely to be susceptible to some significant swings in the weeks ahead.

It doesn’t get any better for Deutsche Bank as it reports a €832m loss for Q3 as it strives to re-energise the business at a time of negative interest rates and weak revenues. Most of the loss came about as a result from restructuring charges, from the winding down of risk from the Capital Release Unit.

In the business as a whole net revenues came in at €5.26bn, down 15% from year ago, and below expectations of €5.58bn. The weakness was seen across the bank with only the corporate bank performing better than it did a year ago, with net revenues increasing to €1.3bn from €1.24bn. All other units of the bank showed a slowdown from a year ago on a quarterly as well as a year to date basis.

Management also said that the reduction in costs had seen headcount fall below the 90,000 level, down 4,750 from a year ago.

Next PLC latest Q3 retail sales numbers showed a fall of 6.3%, though a rise of 9.7% in on line traffic took the sting out of some of that number. A change of weather in October saw retail activity pick up after a weak September with the company saying that it still expected to meet its full year guidance.

In M&A news French car giant Peugeot said it was exploring a merger with Fiat Chrysler as the auto sector battles with a global slowdown and the challengers of migrating to electric vehicles.

It’s a remarkable turnaround for PSA who underwent a near death experience back in 2012, after being bailed out in 2009, the French government then had to intervene again with a €7bn loan or face the collapse of the business. This was followed by a cash injection from China’s Dongfeng in 2014 which saw the Chinese company also take a 14% in the business. Since those dark days PSA has seen a remarkable turnaround, its shares up over 600% from lows just below €4, its share price jumping to its highest levels since 2008.

Fiat Chrysler, on the other hand, was only a few months ago exploring a deal with Renault, a deal which collapsed in the summer due to interference from the French government.  Renault said it had been unable to proceed with the deal because the French government said a number of its conditions hadn’t been met, including guarantees around jobs while Renault’s partners Nissan said they needed more time to analyse it.

Given that the French government also holds a major stake in Peugeot, of 14% it is hard not to see that this attempt by Fiat might well go the same way as the failed Renault attempt earlier this year. Business and government always make uncomfortable bedfellows and despite the synergies a Fiat Chrysler and PSA merger would bring, it is important not to underestimate the political obstacles to a deal.

US markets drifted back yesterday, with investors booking some profits, ahead of today’s latest US Q3 GDP numbers and the latest Fed meeting.

We also have the latest Q4 numbers from Apple where we’ve seen the shares go from strength to strength this quarter, with new record highs and a $1tr valuation. This is despite some underperformance in sales for its latest iPhones in what generally tends to be a weaker quarter ahead of the pre-Thanksgiving and Christmas period where sales generally see an uplift.

The launch of the iPhone 11 could well have seen a bump in sales, after a disappointing Q3, and this could see revenues beat expectations. Services in particular are also likely to be a key area for the business with revenue growth here likely to be a key catalyst as income from handset sales comes under pressure in the months ahead. This pressure on hardware sales also means that the success of new services like TV Plus is going to play an even more important part in the direction of the share price in the weeks and months ahead.

Facebook will also be updating the market with its latest Q3 update. At its last trading update most of the headlines were taken up by the $5.1bn fine as well as announcements of antitrust investigations by the FTC and the Department of Justice. This didn’t stop the company announcing revenues of $16.9bn in Q2, while its key user metrics saw growth in both daily and monthly numbers of 8% year on year.

The company was downbeat about expectations for Q3 citing concern about a weaker outlook due to a slowing economy in Q3, as well as new restrictions on ad targeting from changes to privacy regulations as a result of GDPR. Expectations are for profits of $1.90c a share.