American firms are circling British companies while a Fed official triggers speculation of sooner-than-expected US rate hikes.
Comments from a Federal Reserve official acted to further fan the flames of inflationary fears and deal a blow to markets.
The observation from James Bullard that inflation was stronger than anticipated and could even result in a 2022 rate hike, followed a hawkish switch from the Fed last week, when the likelihood of two interest rate rises in 2023 came to the fore.
As a result, some of the recent optimism surrounding the strength of the US recovery was unwound, with the flagship Dow Jones index shedding nearly 3.5% over the course of the week.
Equally, there is a groundswell of opinion that the reaction to the comments may have been overdone. While the inflation debate is set to rumble on, it is the very speed and strength of the recovery following the success of the vaccination programme and extremely accommodative monetary policy from the Fed which has enabled the economy to snap back.
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Inevitably the Fed will be monitoring the situation closely, and considering whether some of its QE can now be scaled back as the economy gathers pace. Investors will have a further opportunity to assess the situation when Federal Reserve Chair Jerome Powell testifies before Congress tomorrow.
In the meantime, as the end of the half-year approaches, markets nonetheless remain in positive territory. In the year to date, the Dow Jones has added 8.9%, the S&P 500 11% and the Nasdaq 8.9%.
US firm wants Morrisons
The UK market has increasingly been a source of interest this year from overseas investors on valuation grounds. This was further evidenced by a £5.5 billion conditional approach for William Morrison Supermarkets (LSE:MRW) from US private equity firm Clayton Dubilier & Rice.
The approach, worth 230p per share, has initially been rejected by Morrisons as significantly undervaluing the company. The shares had previously fallen by 9% over the last year, contrary to the general market direction, and leading to relegation from the FTSE 100 index in March. Even so, the approach could stimulate some froth in the sector and even shake out other companies who are currently running the slide rule over UK plc.
“This bid in our view is another reflection of the value in the sector,” says broker UBS. There is the possibility that this approach may flush out Amazon (NASDAQ:AMZN), which already partners with Morrisons, although it is thought unlikely to be interested in a full bid. CD&R now has until 17 July to make a bid or walk away.
The implications of this potential M&A activity have not been enough to prevent the UK indices receiving a hospital pass from both the US and Asian markets on inflationary concerns, and how central banks plan to deal with the situation. Both the FTSE 100 and FTSE 250 remain ahead by 8% in the year to date, although some way off their more recently escalating levels.
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