Nerves held steady at the start of a big week for economic and corporate announcements. Investors across Europe pushed shares higher but gains were limited. There is some caution ahead of the decision on US interest rates and potentially make-or-break earnings from Apple (NASDAQ:AAPL). The extra volatility in the bond market puts more emphasis on economic data. That includes Friday’s US jobs report and GDP data from the Eurozone.
A notable underperformer was Italy’s FTSE MIB which underperformed while Italian yields spiked on the suggestion of fresh elections from the Five Star Movement.
On the FTSE 100, the M&A spree continues. It’s been a Triple S of mergers – Shire (NASDAQ:SHPG), Sky and now Sainsbury's (LON:SBRY). The investor confidence on display via these big mergers and the softer pound have dramatically improved the fortunes for FTSE investors over the past week.
Sainsbury’s shares jumped over 15% on news that it had reached an agreement with Walmart (NYSE:WMT) to merge with Asda, while also reporting full-year results. The UK will go from having a Big Four to Big Three supermarket owners. The reduced competition, pricing advantage from greater market share, the large ‘cost synergies’ and cash from property sales all make this deal attractive for shareholders. It is a good one for merger-arb firms because the deal getting past regulators is far from a given.
We are in favor of the deal but there are some assumptions underlining it that have us concerned. Supermarket suppliers are already on threadbare margins so it is not clear a bigger badder Asda/Sainsbury’s combo can squeeze them any further. The shift in shopping habits is toward online orders so having more floor space is going in the wrong direction.
Tesco (LON:TSCO) shares recovered must of the early losses in response to possibly losing its top spot for market share among the Big Four supermarkets. The combined Asda/Sainsbury group will be more competition for Tesco but it also makes the Big Four as a whole more competitive against discounters Aldi and Lidl. A notification from the competition watchdog that the merger will be put under review, potentially meaning it will never happen also helped ease fears for Tesco shareholders.