Minutes from the October meeting of the Federal Open Market Committee released Wednesday took on a decidedly hawkish tone, with clear indications that a rate hike will be announced at the next gathering of Federal Reserve policymakers in December. Futures contracts tied to the fed-funds target rate are now implying a greater than 70 percent chance of a hike next month. Despite confirmation of a tightening bias, equity markets extended gains Thursday morning with European benchmarks achieving multi-month highs and the dollar taking a pause in its rally against primary trading currencies. Despite resilience in markets for financial assets, the rout in commodity markets continues with futures for base metals trading near multi-year lows this morning.
Another tech IPO prices on the low end of scale. Wednesday, San Francisco-based mobile payment-processor Square debuted as a public company below its initial valuation. Today, New York-based dating-site developer and IAC division Match Group is slated to hold its IPO with a target of $3 billion, which is also at the low end of valuations. The company will seek to sell roughly 38 million shares for a total of more than $400 million.
Inflation rises in Brazil. For the first time since 2003, headline consumer price index levels exceeded an annualized rate of 10 percent in Brazil, according to October data released Thursday by the Instituto Brasileiro de Geografia e Estatistica. With Brazil’s economy mired in recession, most analysts expect policymakers at the central bank to forgo a rate hike despite rising prices.
Pfizer to announce offer. Media reports today indicate that New York-based Pfizer is close to an agreement to acquire Irish Botox manufacturer Allergan in a transaction that may exceed $150 billion in valuation. The proposed “tax inversion” merger would be a politically controversial move if it resulted in Pfizer establishing a domicile in Ireland.
US Jobless Claims decline.Initial unemployment benefit claims data released by the Department of Labor on Thursday contracted by 5,000 to 271 thousand remaining near multi-year lows. The four week moving average declined by 3,000 to a seasonally adjusted 270 thousand.
Shipping demand plummets. The Baltic Dry Index, a gauge of shipping capacity that rose to prominence as an economic indicator during the immediate post credit crisis, contracted by 3 percent on Thursday to reach an all time low of 504. Global freight lines have seen dramatically reduced demand as Chinese commodity imports cooled year-to-date.
Towers Watson raises bid. After failing to gain needed shareholder approval, media reports on Thursday citing unnamed sources indicate that Towers Watson & Co. will increase its bid for Willis Group Holdings PLC from the initial $18 billion offer. After failing to secure the necessary majority during a vote on Wednesday executives at Towers Watson have a delay until Friday to present new terms to shareholders.
Portfolio Perspective: Australia Cross-Currents
Although Australia and China’s relationship is thought to be solely related to trading in commodities, capital-account movements have become much more significant. During the past six months as metal prices plunged, capital outflows from China appear to have been recycled through the Australian banking system. This in turn has ‘softened’ the blow of the plunge in commodity prices into the economy.
Although the Australian equity market has underperformed major developed economy equity markets over the past quarter as concerns have increased over the magnitude of the slowing in the Chinese economy, it could have been a lot worse. Australia’s currency has recovered only modestly after touching five-year lows due to the deterioration in the country’s terms of trade.
However, global capital flows have still been kind to Australia and this seems to have imparted an expansionary bias to the banking and credit side of the equation, offsetting some of the weakness in exports. China’s large capital outflows seem to be providing Australia’s domestic service sectors with a significant stimulus, even as China’s economy exerts a more deflationary impact on Australia’s traded-goods sectors such as resources.
Sean Darby is chief global equity strategist for Jefferies in Hong Kong.
