Kraft Heinz drops Unilever offer, as Trump trade lives on

The main market stories over the weekend included positive news for Athens, the IMF will now provide cash, to the tune of EUR 5 bn, for its new bailout, which makes it more likely that the Troika will release funds for Greece’s third bailout, in time for it to pay debt repayments due in July. There was bad news for Theresa May regarding Brexit negotiations, with the EU saying that it won’t start trade talks until next year; and the main corporate news was the withdrawal of Kraft Heinz’s offer for Unilever on Sunday.

French politics likely to overshadow Greek bailout news

The markets are likely to be fairly quiet on Monday as the US has a public holiday, but the above is likely to keep the European session lively. The German Finance minister seemed content that if the IMF participates in the third Greek bailout then the threat of Grexit will evaporate. The markets haven’t had a particularly strong reaction to this news, however, we expect to see Greek bond yields decline on Monday as a result of this step towards a third bailout for Greece, with plenty of time before its next big debt repayment.

The euro’s reaction could be more muted, its lacklustre performance at the end of last week was put down to the spike in French bond yields, after France’s political left said that they would join forces to fight the upcoming Presidential election, which was considered a boon for the far-right candidate Marine Le Pen. With the Dutch election coming up next month, which could see big wins for its far-right PVV party, politics could weigh on the euro for some time. EUR/USD lost momentum last week, and may continue to do so in the coming months.

Leaked news thwarted Kraft’s next big move

Kraft Heinz management were obviously spitting feathers at the leaking of their proposed offer for Unilever on Friday. The company withdrew its $147bn offer for Unilever on Sunday, after acknowledging that they received a pretty stern rebuttal from Unilever management. We expect the chief reason to drop the bid was concern about the political atmosphere in Britain, which is currently against foreigners making bids for “national treasures”, even half-Dutch ones like Unilever. Also, the leaked announcement sent Unilever shares surging 15% on Friday, so a protracted battle for ownership would have made it an expensive deal for Buffet and co. at Kraft Heinz. Interestingly, Kraft Heinz’ share price also rose more than 10% on Friday, which helped to drive the S&P 500 to a positive close on Friday. Now that the deal is off the table, and it doesn’t look like Kraft is planning a new offer any time soon, we could see both company’s share prices fall back, which could weigh on the US index once the US comes back from the Presidents’ Day holiday.

More woe for the pound

The news flow from the EU isn’t too encouraging for the pound, which closed the week down nearly 1% vs. the USD. Early trading has seen GBP/USD hover around the 1.24 mark; the only hope for recovery would be less hawkish than expected minutes from the Fed on Wednesday (see more below). Theresa May’s plan to get a quick trade deal with the EU has been thrown into doubt by the EU’s chief negotiator’s position that there will be no trade talks until the UK has sorted out its budget obligations to the EU and confirmed the position of EU nationals living and working in the UK. It will be worth noting if any of the EU’s big exporters’ to the UK stand up to the EU negotiator on the back of this story, if yes, then the impact on UK asset prices could be minimal.

Trump is the tail wagging the Fed’s dog…

The Fed minutes on Wednesday are likely to be the data highlight this week, as investors digest “hawkish” comments from Janet Yellen during her testimony to Congress last week. On balance, I agree that her testimony was as hawkish as it is likely to get, after all, she mentioned interest rate hikes and balance sheet adjustments in one speech. The minutes will be useful to try and gauge whether the prospect of a Fed rate hike is likely at the March meeting. The Fed Funds Futures market is currently pricing in a 34% chance of a hike next month, before Yellen’s testimony this had been closer to 28%.

Republican battle for a tax plan key risk for markets

Interestingly, the dollar and US Treasury yields both had a fairly lacklustre week, while US equity markets kept rising. Why is the market failing to listen to Yellen? Largely, because Trump shouts louder. There is a divergence in the markets’ attitude towards Trump’s economic plan, particularly his tax plan. While the equity market is still hopeful that Trump can cut corporate taxes and boost fiscal spending, the FX and Treasury market seem more sceptical. Reports that House Republicans are divided on the issue of the border tax - or import tax - which is necessary to fund a planned corporation tax cut, has left bond and FX investors in some doubt as to whether a deal will be passed, and if the tremendous fiscal spending Trump keeps banging on about will ever come to fruition. However, the irony is that this scepticism is weighing on bond yields, and the low cost of capital is also driving the equity market higher.

The Fed minutes are unlikely to commit to a March rate hike, especially because the Fed has worked its way into a corner where it is now dependent on the Trump administration’s fiscal plans before it can change policy. We expect more clarity on Trump’s fiscal plans when he gives his State of the Union address to Congress on 28th February. Until then, this perverse merry-go-round with bonds and FX weaker, while US equities continue to climb is likely to keep spinning for another week.