Key News
* Euro Drops to Almost Four-Month Low as German Confidence Ebbs (Bloomberg)
* UK Consumer Prices Post Largest Jump on Record (WSJ)
* Japan Airlines files for bankruptcy (Financial Times)
* China Yields Rise For 2nd Straight Week (WSJ)
The Event Agenda
Afternoon Run-Down
Some country specific news and elevated risks pushed the dollar higher against nearly all currencies today, except the pound. The dollar index has experienced a shallow retracement following the aggressive December rally, and is now moving higher again, a constructive technical sign and evidence for a prospective new bullish trend.
The pound is stronger against most currencies after hotter than expected consumer price data. Inflation is running above the Bank of England’s 2% target. But don’t get too excited on the interest rate front. The BOE acknowledged in its November Inflation Report that inflation was likely to make some short term blips above the target, but the excess capacity in the UK economy would likely keep the more sustained rate of inflation below target through 2012. Those expectations will keep the BOE’s foot on the pedal for loose monetary policy—prepared to add more asset purchases when needed.
Another key factor underpinning sterling (GBP) is being merger related. U.S. based Kraft appears to have won a four month battle for shareholder support for a takeover of UK based Cadbury. The offer values Cadbury at 13 times 2009 EBITDA. The deal was more lucrative than the previous bid … by an additional 1.7 billion pounds and consists of more cash than was previously offered. And the required UK currency to execute the deal created demand for pounds on the announcement.
The pound has been favored over euros in recent weeks, but with this M&A activity out of the way I expect the pound to start playing catch up to the weak euro.
The euro has broken below its 200-day moving average on the growing sovereign debt risks within the Eurozone. The once thought contained debt problems in Dubai are now building into a storm for Europe. Greece continues to be under pressure to present a viable plan to reduce its budget deficit and ratings agencies are stepping up scrutiny elsewhere in the Eurozone … today Fitch warned on Spain, the UK, and France. This escalating situation exposes the reverberations from the global financial and economic crisis, which will likely prove to damage global risk appetite—a negative for global equities, commodities and foreign currencies.
Adding to the elevated risks, the Japan Airline bankruptcy sends a message. The Japanese government didn’t provide a safety net for a “too big to fail.” That’s yen negative. Also, China continued to pull in the reins on liquidity increasing speculation about asset bubbles in China—risk appetite negative.
Next week we have three central bank meetings: Japan, the U.S. and New Zealand. And we get more Q4 GDP data from the UK, the US and Canada.
Here’s a look at the charts…
Key Charts
Kraft/Cadbury
Kraft bought Cadbury for 19.5 billion dollars, $2.7 more than its initial bid. Cadbury shareholders got an extra 3% premium from Monday’s close on the announcement of the deal—a 46% premium from where the shares were trading in September when the takeover intentions were first announced.
British pound
Here’s how the M&A speculation has affected the pound…
New Zealand dollar
Commodities were down 4% last week following a crops report that showed a record supply build in some areas, damaging the bullish argument for agricultural commodities … yet the highly correlated New Zealand currency has not responded with weakness. It will be important to watch the inflation data tonight and central bank meeting on rates next week. If the market doesn’t get hawkish language from the RBNZ, expect the kiwi to drop sharply.
USD/JPY
I showed this chart last week, projecting a shallow retracement in USD/JPY to the area where a convergence of technical support resided … the 38.2% Fibonacci retracement of the recent climb from the November lows, along with the 50 and 100 day moving averages. This area held nicely this morning and the uptrend in dollar trend appears to be resuming.
{ 1 comment… read it below or add one }
Hello Mr Rich
There was another large company in England, Rowntree McIntosh who also made chocolate products, along with smaller companies such as Joseph Terry of York, who were acquired by Nestle and Kraft respectively. This resulted in cost cutting almost immediately, although at the time (late 1980’s) the then government was assured that there would be no job losses, although over time time job losses and other cost cutting measures such as outsourcing production abroad recently (particularly to Eastern Europe) have been implemented. Cadbury’s have now gone the same way. The have outsourced the more popular brands to Poland and France. This along with the change of recipe for their chocolate (i.e. putting soya in it) has devalued the brand slightly in my opinion as many years ago they did not do this. As your colleague Mike Larson mentioned back in October, cocoa futures and soya prices have risen and this has forced prices up. Another thing is that Cadbury seem to have created a business model where large bars are sold in pound shops (for the cheaper end of the market) and there are also allegations of price fixing (i.e. a smaller bar is sold for £1, though it would cost about 90 pence) so Kraft would need to deal with this. There is a lot of bad feeling about this in the UK, and reports that Kraft going into debt to acquire Cadbury are going to cause them problems. In addition to this, some UK consumers don’t like Cadbury products. There are going to be big problems with this takeover.