24 August 2021: City cool on Sainsbury’s takeover

City cool on Sainsbury’s takeover

24th August: Highlights

  • Sterling buoyed by Sainsbury’s bid talk and despite weak services PMI
  • Softening demand slows manufacturing and services output
  • Composite PMI a little weaker, in line with expectations

Sterling buyers speculate over mega-deal

The pound was particularly volatile yesterday as traders tried to decipher signals coming from the equity market regarding a potential bid from a U.S. private equity firm for the UK supermarket chain Sainsbury’s.

At times when U.S. firms are bidding for control of a UK entity, there is a mistaken belief that the buyer will need to buy a significant amount of Sterling to complete the purchase. The fact is that these deals, although valued in billions, are almost never cash transactions, and are never completed in a short time frame.

Therefore, any purchase of Sterling is unlikely to be a single transaction, or series of transactions, and even if they were, they would take place over such a long period as to have no effect on the value of Sterling.

The next few months will see the pound to be driven by the market’s perception of the strength of the economic recovery from the Coronavirus Pandemic and the timetable for the Bank of England to begin to taper asset purchases.

Once purchases begin to be slowed, it will happen over several months and will be done for totally separate reasons from the eventual raining of short-term interest rates.

As Andrew Bailey, the Bank’s Governor, has said several times recently, the two are totally individual actions. The MPC still considers monetary policy as its primary tool for delivering the Government’s inflation target.

The Asset Purchase Scheme was introduced to ensure that there was a plentiful supply of liquidity to the market during the Pandemic.

Data is the only solid form of indication about how the economy is recovering, and yesterday’s release of the first estimate of output for August was slightly disappointing.

Services output remains well above the marching between expansion and contraction and close to its long-term average. However, the services PMI fell back from 59.6 in July to 55.5 this month. The less significant manufacturing PMI was virtually unchanged.

The date reflects the difficulties that the services sector is having recruiting staff. There are several reasons for this, but probably the most obvious is the lack of EU workers following Brexit.

Yesterday, the pound recovered recent losses versus the dollar. It rose to a high of 1.3720. It closed at 1.3731.

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Fed Chair’s second term would reduce economic concerns

As reported yesterday, the reappointment of Jerome Powell as Chairman of the Federal Reserve is strongly supported by Treasury Secretary Janet Yellen.

She reiterated her support yesterday, and this is likely to be all President Biden needs to add his own endorsement.

Powell was something of a surprise appointment, being the first Chairman without a background in economics.

Powell has grasped the basics of the role well and given his background in law, has managed to provide the degree of advance guidance the market deems necessary, without showing his hand too quickly.

There have been times when the market has tried to second guess FOMC intentions, but Powell has also proven himself to be skilled at keeping it guessing.

The situation in Afghanistan continues to go from bad to worse, and this is beginning to affect global risk appetite. In normal times, this would have led to a rise in the value of the dollar However, the market continues to be enthralled by the domestic economy and the prospect of the Fed tightening policy by withdrawing support.

In much the same way as Andrew Bailey has attempted to draw a line between withdrawal of support and raising interest rates, Powell has attempted to say that any rise in the Fed Funds rate will be some considerable time coming.

The next month will be critical as the onset of Autumn will see temporary, seasonal labour shortages disappear to be replaced by a more permanent shortage, particularly of skilled labour.

As far as the Fed is concerned, it would prefer that the market isn’t distorted by outside factors, but it will need to decipher the data once it begins to withdraw support.

If labour shortages become a genuine threat to the expectation of a fall in inflation, rates may need to be raised late next year as opposed to twice in 2023 which is the current expectation.

As expected, the dollar is experiencing a correction following last week’s rally on the back of slightly more hawkish FOMC minutes. Yesterday, it fell to a low of 92.94 and closed at 92.98.

The ECB is happy to have no agenda to conform with

PMI data released yesterday for the Eurozone was mixed, leaving those who believe that the ECB’s current dovish policy still at odds with those who see it adding to inflation rather than being designed to curb rising prices.

The preliminary data for the composite index fell to 59.5 from 60.2 in July. This is hardly a catastrophe but adds ammunition to those who favour policy remaining as it is for some time to come.

The data for Germany was significantly worse than that for the entire Union. This is significant since inflation is rising more quickly there.

This indicates both the two-speed nature of the recovery and the problems facing the Bundesbank, in that the economy needs support, but it finds it nigh on impossible to live with rising prices.

The ECB itself remain committed to continuing the status quo, although it is hard to make decisions affecting the entire region with some economies performing far better than others and having to deal with decision-making by majority.

The union is no closer to being able to solve the riddle of having a Governing Council made up of nineteen Central Bank Heads, each with their own monetary policy agenda. This is a mindset that is impossible to deal with long-term and the

EU Commission is going to produce structural change to ensure the long-term survival of the Union.

The EU Commission President Ursula von der Leyen has had a bruising year, particularly regarding her tactics to try to ensure that the EU received the lion’s share of Covid vaccinations.

She appears to have gone to ground recently and may still need to consider her position as things begin to return to normal next year.

A strong political presence, praising the unity of the EU will be needed to defeat rising feelings of nationalism that may appear in the political arena in 2022, will be needed.

Yesterday, the single currency recovered its recent losses and climbed back above the important 1.1700 level.

It reached a high of 1.1750, closing at 1.1745.

The recovery was probably a little magnified by the number of short positions that had to be liquidated as technical resistance was breached.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”