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No pivot from Powell, as ECB suggests a 75bps rate rise might be coming

euro

European markets were looking at a fairly quiet session up until Fed chair Jay Powell’s speech at Jackson Hole where he gave little indication that the Fed was in a mood to execute a pivot when it comes to monetary policy.

Europe

Powell’s message of higher rates for longer, along with a report that the European Central Bank was looking to discuss a 75bps rate hike in less than two weeks’ time has seen the DAX slide to its lowest levels this week and has led the rest of Europe’s markets lower, with the FTSE100 also heading back towards the lows of the week.

A tentative ruling by a district judge in Florida that time limits the ability to file a claim on Zantac against the likes of Haleon, GSK and Sanofi could mean that any damages are likely to be much lower than originally feared by markets. This has helped push up the respective share prices of all three, having seen some big losses in the past few weeks.

Another UK tech company has fallen prey to an overseas takeover after Canada’s OpenText announced they had agreed a deal to buy Micro Focus for 532p per share, a 99% premium to yesterday’s closing price. While the size of the premium has raised eyebrows the price is still below the peaks of last year. Nonetheless the slide in OpenText’s share price suggests that markets think they may have overpaid for it.

The weak pound is probably one factor in today’s move, helping to make UK valuations more appealing, however the company’s shares have been struggling for some time with today’s bid price putting them back to where they were just over a year ago. Annual revenues have been in decline since 2018, as has EBITDA, with the company carrying a lot of debt.

It therefore makes sense for management to look at this offer favourably, however it’s a stretch to argue that the UK is losing one of its tech crown jewels, given the company’s poor performance over the last four years.

French video games maker Ubisoft shares are higher on reports that Amazon is looking at making a bid for Electronic Arts in the US, who make the FIFA franchise of console games.    

US

US markets opened where they left off yesterday, with very little reaction to the latest PCE inflation numbers for July which showed a further softening in inflationary pressure. Personal spending also slowed sharply in July after the big rebound in June, indicating that higher prices were starting to impinge on consumer spending.  

Powell’s comments elicited some market volatility, pushing yields higher, with the Fed chair showing little sign that the central bank was in any mood to pivot on rate hikes yet. There was nothing in what he said that suggested the FOMC was leaning towards a softer tone, but we already knew that given the commentary from a series of other FOMC members earlier this week. The consensus view now appears to be higher for longer, with more rate rises to come, as we head into year end.

These comments, along with reports that the ECB could go with a 75bps move next month, has seen markets roll over.    

Video game maker Electronic Arts shares have been in focus today after premarket open speculation that Amazon might be looking to mount a bid. While this appears to have been denied, the reports come off the back of recent M&A in the industry when earlier this year Microsoft bought Activision for $68.7bn earlier, as the big tech giants look to boost their content models, although unlike Microsoft, Amazon don’t have an obvious delivery system like the X-Box. Of course, they could add further content by way of the Firestick with online games.

Moderna has said it is suing Pfizer and BioNTech for patent infringement over the development of their Covid-19 vaccine.

FX

The US dollar was trading near the lows of the day in the leadup to this afternoon’s speech by Fed chairman Jay Powell, although this was partly driven by a headline out of Europe that some ECB policy makers wanted to discuss a 75bps rate hike when they next meet on 8th September. This news prompted a sharp surge in European bond yields, on both the short and long end

This pushed the euro up to a one week high against the greenback. Powell’ s comments did little to shift the dollar back up, suggesting that perhaps the lack of a dovish pivot was priced in by markets. It also shifts the markets focus towards next week's payrolls report, with another good jobs number reinforcing the expectation of another 75bps rate rise next month.      

Commodities

Gold prices have slipped back from one-week highs in the aftermath of Fed chair Jay Powell’s comments at Jackson Hole. His comments that rates were likely to remain higher for longer has taken some of the heat out of the recent rebound in the yellow metal, as it looks to close lower for the first time since Monday.   

While crude oil prices look set to hang onto most of their gains this week, we have slipped back from the highs of the day on the back of the Powell comments. Oil prices continue to look reasonably underpinned given this week’s commentary from OPEC about the prospect of production cuts, with the UAE becoming the latest member suggesting a cut might be in order, but with recession concerns rising, fears over demand destruction do appear to be increasing.


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