Daily Agenda: Heineken Rejects Take-Out Bid

More jitters over the Scottish vote weigh on the sterling; Chinese regulators step up pressure on banks.


While this week’s Federal Open Market Committee announcement and Scottish independence referendum stand to be central macro themes, the biggest litmus test for market sentiment may well be the Alibaba Group IPO. With its road show on full steam, reports have surfaced that strong investor demand has led the company to increase the initial offering price beyond the initial range shown to investors. On one hand the largest Internet commerce company reaching the rapidly developing Chinese consumer base would seem to be an obviously attractive play for institutions and asset managers looking for growth in the global consumer markets. The rich valuation, coming at a time when U.S. equities are at historic highs, also suggest that the risk appetite of investors generally remains strong regardless of geopolitical and policy threats.

Brewer rejects offer. In a statement today, Amsterdam–based brewing giant Heineken is declaring that the firm had rejected an acquisition proposal from SAB Miller, the world’s second-largest brewing company and stated that it intends to remain independent after discussions among senior management and the founding family.

Scottish vote looms. Over the weekend the U.K. government made a last-minute push to convince Scottish voters to defeat a referendum for independence ahead of Thursday’s vote. Analysts have been divided over the total impact that a separation would have on the U.K.’s economy. But they do agree that the net-negative impact on gross domestic product would be profound. In a note to clients released this morning, Société Générale strategist Albert Edwards noted that a ‘yes’ vote is possible and that “The obvious market conclusion is for a weaker sterling — but a proper old-fashioned crisis is plausible.”

Chinese regulators bring on new banking rules. The China Banking Regulatory Commission announced new rules requiring lenders to submit so-called month-end deposit deviation indicators. The data will be used to place restrictions against any bank with a deviation to the daily average in excess of 3 percent. This is the latest signal from Beijing indicating concerns over hidden liabilities in regional financial institutions, as shadow-banking exposure taken on in the years following post-crisis stimulus measures begin to sour.

Numbers from China show economic slowdown. Data from China released over the weekend surprised to the downside, with August industrial production, fixed-asset investment and retail sales all registering lower than consensus economist forecasts. Production levels in particular surprised observers at a year-to-year growth level of 6.9 percent, versus an expected 8.8. On Saturday, the National Bureau of Statistics released a report that the pace of housing sales has dropped by 11 percent year-to-date, versus the same period last year.

U.S. industrial data on deck. The Federal Reserve is scheduled to release August production and capacity utilization data today. Consensus forecasts are for a marginal slowdown in the pace of overall output growth with marginally tighter utilization levels. After unexpectedly high activity levels in July, such a healthy showing would be further evidence of returning strength in the industrial sector.

Swedish anti-immigrant party gains seats. Election results in Sweden, Scandinavia’s biggest economy, pose a challenge for the nation’s parliament as the far-right anti-immigrant Sweden Democrats now hold 49 seats, with the other, primarily left-leaning, parties refusing to work with them.

Portfolio Perspective: U.S. Finds Its GrooveSal Guatieri, BMO Capital Markets

Even as the rest of the world struggles to sustain decent growth — or, in the case of the euro zone, any growth — the U.S. economy has found its groove, driven by an upswing in business investment and automotive sales. After rebounding 4.2 percent in the second quarter, the economy looks to have slowed only moderately to a still-decent rate of near 3 percent in the third quarter, with upside risk.

Still, consumer spending, the largest economic driver, has yet to shift into top gear. After growing a middling 2.3 percent year-over-year to second-quarter 2014, personal spending fell in July, despite higher employment, record stock prices, and lower gasoline prices. Even with a likely auto-led pickup in August, spending will be hard-pressed to top 2 percent in the third quarter. The culprit is static wages, which are barely outrunning inflation, thus are curbing spending power. We do expect consumers to take the spending baton from businesses when wage growth picks up in response to falling unemployment, however.

With QE3 likely to end in October, look for rate hikes to begin in June 2015, about when the jobless rate will have fallen to levels that might trigger wage inflation. But with other measures still indicating slack, the Fed will proceed slowly, raising the funds rate only to 1 percent by the end of 2015.

Despite stronger growth and fewer asset purchases by the Fed, Treasury yields have fallen to 14-month lows, driven by the conflict in eastern Ukraine, strong demand from foreign investors, notably China, and bank buying to meet new liquidity guidelines. Most importantly, continued stimulus from the European Central Bank has pushed European rates to new lows, improving the relative attractiveness of Treasuries. Global secular forces, such as an aging population and public-sector deleveraging, are also tamping down yields. Still, a stronger economy and tighter Fed policy are expected to lift the ten-year Treasury yield from its current 2.4 percent to 3.0 percent by the end of 2014 and to 3.5 percent in late 2015.

Sal Guatieri is a senior economist at BMO Capital Markets in Toronto.