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Every Londis helps!

End of a historic week for the Dow

It has been a week of celebration in the market since the Dow Jones finally cracked 20,000 for the first time ever. Wall Street opened slightly lower on Friday but the Dow should comfortably finish the week above 20k.


The FTSE 100 was little changed on Friday, continuing a streak of ultra-low volatility since the Supreme Court upheld its decision that the government will need the go-ahead from parliament to trigger Article 50 will need. Once parliament does approve Article 50, we think a period of lower volatility in the British pound could help the FTSE 100 decouple from its negative relationship with the pound. With a more stable British pound, the UK stock market will be in a better position to join the ‘Trump rally’.


Every Londis helps!

Shares of Tesco leaped over 9% after the supermarket revealed its intention to buy Londis and Budgens-owner Booker for £3.7bn. The deal will create a dominant player in the UK food industry. It will expand Tesco’s reach into the convenience stores market and give Tesco more muscle over its supply chain. Competition authorities pose the biggest risk to a successful outcome. Regulators will be concerned Tesco’s dominant position in the food industry will reduce competition and disadvantage consumers.


If squeezed suppliers thought they might be in for improved margins as inflation returns this year, this deal may cause them to think again. Representing supermarkets, convenience stores and the wholesale business will give Tesco massive buying power. Comparable sales have begun to rise again after a series huge price cuts. This deal would put Tesco in a strong position to keep prices low to compete with discounters Aldi and Lidl.


The warm reaction in the market has put Tesco shares back into the positive again for 2017. Shares made a one-year in Q4 of 2016 but have been easing off over fears that rising input costs would eat into margins this year. If the deal is completed, it adds to our conviction that the current share price significantly undervalues Tesco.


Next week’s central bank meetings

The US dollar was mixed on Friday, gaining against the yen but falling against the euro after US Q4 GDP data missed expectations. Currency markets appear to be correcting recent trends as traders shift focus to a busy economic calendar next week including three central bank meetings.


It’s the Bank of Japan early Tuesday, The Federal Reserve on Wednesday, The Bank of England including the quarterly inflation report on Thursday and then non-farm payrolls on Friday. None of the three central banks are expected to change monetary policy but with inflation on the rise globally as oil prices recover; markets will be looking for the central banks to acknowledge this as a sign that they are turning more hawkish.


The US dollar rose steeply toward the end of last year on expectation that the Federal Reserve would be the first in the impending tightening cycle. Since the rate hike in December the dollar has pulled back. Next week could be a key decider as to whether the dollar uptrend resumes or goes into full reversal.



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