French assets start to (Pepe Le) Pew

Political developments in France and Greece and the absence of US investors, who were busy celebrating Presidents Day, meant European stocks showed no clear direction on Monday. Europe is caught between the good news of a likely Greek bailout deal and the bad news of rising anti-EU sentiment in France before its election.

The FTSE 100 was little changed as the pound edged higher against the euro and the US dollar, despite tough talk from the EU’s head Brexit negotiator ahead of discussion in the house of Lords over the Brexit bill.

Unilever down but not out

Shares of Unilever slumped on Monday, though still remain above pre-bid levels. A hostile reaction to the idea of a takeover from both Unilever shareholders and British politicians seems to have sent Kraft Heinz packing. Warren Buffet is not known for his hostile takeover bids and likely snubbed the deal as soon as its existence was leaked early. We were optimistic the Theresa May government would have waived it through, just like it did with ARM but Kraft obviously wasn’t willing to take the risk. Given Kraft’s legacy of broken promises after its takeover of Cadbury’s, it’s surprising Kraft seemed unprepared for a backlash. 

The fact that Unilever shares have kept up some of the gains, suggests some ‘semi-deal’ could still be on the table. A future Kraft takeover of part of the Unilever business, perhaps part of its foods division is still possible. Other UK-based foods companies including Associated British Foods and Tate & Lyle fell on the reduced scope for a string of deals in the sector.

No W&G sale brightens RBS outlook

Shares of RBS jumped to a 12-month high on Monday on news it will avoid selling off its Williams and Glyn branch network. The plan to cancel the forced sell-off of the branches under EU state aid laws would make the outlook for RBS a lot clearer. IT system complications and a lack of potential buyers meant a W&G deal was unlikely before the 2017 deadline anyway.

Instead RBS proposes to take a £750m provision in its 4th quarter results for setting up a fund to help Challenger banks and promote banking competition. The EU probably sees the writing on the wall for W&G and will just take a quick result. If the EU does waive the plan through, RBS could be looking at its first dividend payout since the financial crisis as early as this year. Today’s gains could be short-lived depending on Friday’s Q4 results, but a dark cloud has been lifted over RBS.

French assets start to (Pepe Le) Pew

A preference for German over French financial assets is becoming clear to see in stock and bond markets. German 2-year yields hit a fresh record low while the spread between German and French yields continued to widen. France’s CAC index spent most of the day in negative territory whilst Germany’s DAX index briefly hit a 3 week high.

Polls showing Emmanuel Macron would beat Marine Le Pen by a smaller margin in the final round of the Presidential election in France have increased the risk premium on French assets. Riots in several urban areas across France have boosted the appeal of Le Pen’s nationalistic agenda. Not helping his own cause, Emmanuel Macron made comments equating France’s role in Algeria as “crimes against humanity.”

The pattern of polls lulling markets into a false sense of security before suddenly turning and causing hysteria is becoming a familiar one. We believe markets are still under-pricing populist risk in France and the Netherlands, meaning wider spreads on Germany/Netherlands, Germany/France debt are likely.