European stocks start timidly, Morrisons bidding war rages

A meek start to equity trading in Europe on Monday follows another record-breaking session for Wall Street on Friday. The Dow Jones and S&P 500 both rose to new all-time closing highs after a stellar jobs report indicated the US economy is purring, whilst a very strong earnings season has underpinned support for the broader market. Shares in London and Frankfurt were a tad lower though the Euro Stoxx 50 was steady, the dollar hit its strongest versus the euro in 4 months, oil prices were weaker, and gold declined sharply overnight.

Private equity raiders: Shares in Morrisons traded 0.5% higher at 280p after the Takeover Panel extended the deadline for CD&R to improve its offer for the grocer. The move comes after rival Fortress upped its offer to 270p plus a 2p special dividend, marking a total consideration of almost £10bn. The move by the regulator to give CD&R more time suggests this bidding war is not over yet. The group has until Aug 20th to make a final bid and we can expect that they will try to deliver a knockout bid by then. I think it was a month ago I suggested 280p would be required for a knockout and that is where shares trade this morning as investors expect just a little more juice to be squeezed from this. Meanwhile, Vectura shares rallied a further 2% to 167p after Philip Morris raised its offer to 165p after Carlyle’s recommended 155p offer on Friday.

A key leading indicator for the global economy is roaring higher. Chinese inflation topped estimates, as the official producer price index rose at a racy 9% in July from a year earlier, accelerating from the +8.8% in June. CPI rose at 1%, but it’s the Chinese PPI that is the important measure for investors looking at where global CPI will be heading in the coming months.

A very hot jobs report from the US on Friday has left investors expecting the Fed to taper earlier, with this month’s Jackson Hole symposium seen as the likely place for the central bank to lay out a timeline for reducing its support for the economy. The NFP report showed US employers added 943k jobs last month, beating forecasts, whilst unemployment fell to 5.4% and wage growth accelerated to 4%. Yields rose and Fed Funds futures steepened in the wake of the report and all eyes now focus on the CPI data this week. Core inflation is expected to moderate from 4.5% to 4.3% but this is no guarantee and another hotter-than-expected reading would leave the Fed nowhere to go except to taper. As ever we will be looking squarely at the core month-on-month reading to give a read on how transitory the inflation is. In addition to the CPI report there is a raft of Fed speakers slated for this week.

Gold sank sharply in the Asian session overnight as the momentum from Friday’s strong jobs report carried through the weekend and accelerated in an illiquid session with Japan and Singapore being closed for a holiday. Spot prices dropped to $1,684, just falling short of touching the March lows, but in the process breaking beneath longer-term trend support.