FTSE250 lifted to a new record by M&A

Europe

European markets have got off to a good start this week, after getting a decent handover from markets in Asia, pushing the Stoxx600 to new record highs, along with the FTSE250, which has been given a lift from more M&A activity, while the FTSE100 has edged up to 7,100 and a two week high. 

UK defence firms have seen a lift today after Meggitt announced it had agreed an £6bn deal from US firm Parker Hannifin, for 800p a share, a 71% premium on Friday’s closing price.

Meggitt is a key defence contractor for the UK military, supplying a range of systems including thermal and weapon scoring systems, as well fire protection and control systems and avionics. Parker Hannifin is a US firm that is also a supplier to the UK government, however given concerns about national security this deal might encounter some scrutiny, with reports that the Business Secretary Kwasi Kwarteng is looking at the deal.

The deal was announced at the same time as Meggitt announced its interim H1 results for 2021, which saw revenues decline 26% to £680m, although the second quarter has improved relative to Q1, with civil aviation proving to be the main drag.  

We’ve already seen other UK companies come under the scrutiny of possible overseas buyers including Senior, which recently rejected a bid from the US Investment Company Lone Star, while only last week the UK government suggested it might intervene in the proposed deal for Ultra Electronics, by Cobham, which is owned by US private equity group Advent International.

The shares of QinetiQ, Chemring and Babcock’s are all seeing decent gains, while Melrose Industries is also higher due to its exposure to the sector due to its acquisition of GKN in 2018.

This morning’s announcement once again appears to underscore the trend for overseas companies to see more value in UK assets than UK asset managers do, and while the UK government has gone to great lengths promote the UK as a great place to do business, a lot of overseas companies seem to have interpreted this as the UK being a great place to go shopping for undervalued businesses.

I’m not sure that’s what the government meant by taking back control. Seems like giving it away to me, and while there may be some value in some M&A deals, history has taught us that any promises made by the company doing the bidding tend to be hollow ones when it comes to safeguarding jobs.

Advent’s promises surrounding its acquisition of Cobham turned out to be hollow ones, if recent comments from Nadine Cobham last month are any guide in which she criticised the breakup of her father-in-law business.    

Sanne shares are also higher after announcing it was in advanced talks with APEX group.

Supermarket WM Morrison is also higher on reports that another offer from private equity firm Clayton, Dubilier and Rice might be forthcoming, in an attempt to trump the Fortress bid.

HSBC shares are struggling to go anywhere despite reporting Q2 profits after tax of $5.3bn, a much better than expected outcome, despite lower revenues. The headline numbers were helped by the bank releasing another $300m from provisions for non-performing loans, on top of the $400m released in Q1.

This boosted H1 profits after tax to $8.4bn with the bank announcing an interim dividend of $0.07c a share. the decline in revenues was largely down to lower interest margins across all of the bank’s global operations, which fell from 1.43% a year ago to 1.21%

The UK bank also had a good first half, generating $1bn of profits in Q1, it continued this trend with another $1.1bn in Q2.

In common with its peers HSBC reported a decent increase in lending over the period, rising $21.5bn in the first half.   

IAG is also higher in anticipation of a change in travel rules from the UK government later this week.

US

US markets have opened higher, lifted by the positive start for Asia and European markets, as we get set for a big week of economic data for the US economy. The latest US Manufacturing PMI number for July saw a modest increase to 63.4, while the latest ISM manufacturing report came in at 59.5, a modest fall from June, while prices paid fell from a record 92.1 in June to 85.7. More encouragingly, employment rose from 49.9 to 52.9.  

Moderna shares have made new record highs today on reports that they, along with Pfizer, have agreed higher prices for up to 2.3bn vaccine jabs, with the Moderna one pricing at $25.50 a dose.

The shares of BioNTech shares are also up on the day, also making new record highs as investors warm to the prospect of a 25% price rise. On the subject of accusations that these increases seem excessive there seems to be a deafening silence from both the US and the EU on a topic that has historically been a bit of a political blow torch.

FX

The US dollar appears to be languishing at the moment just off one-month lows, as we look towards this week’s economic data, and particularly importantly the latest data on the US jobs market. There was an expectation that we might get close to seeing 1m jobs added in July, however the last two weekly jobless claims numbers have seen some of that optimism disappear, with estimates now starting to edge below 900k.

The Australian dollar is the best performer ahead of tomorrow’s RBA rate meeting, where its widely expected that the central bank will have to reverse course on its previous guidance that it would look at tapering its bond buying program. In July the bank said it would be reducing its bond buying from A$5bn to A$4bn a week. With Delta cases rising across Australia and restrictions being imposed across the country it is perhaps surprising that the Australian dollar is rising, however the policy reversal is widely expected and the currency isn’t too far from its lows this year. The economic projections are also likely to be revised lower.    

Commodities

While stock markets are starting the week in positive territory, oil prices have come under a little bit of pressure, as further production output gets released by OPEC+, against a backdrop of a slightly weaker manufacturing PMIs out of China earlier this morning. The latest Caixin manufacturing PMI recorded its lowest reading since May 2020, with new orders and production slipping under the pressure of higher prices.

Gold prices are being held back by the upbeat nature of today’s moves higher in global stock markets.