Tescos surprises investors with merger and Dow Jones hits historic high
The UK economy grew by 0.6% in the fourth quarter of 2016 meaning that the total for the year was 2%. This is slightly lower than the 2.2% posted in 2015 although significantly above what was anticipated following the referendum in June. The strong final quarter means that the UK is showing few signs that the referendum result has yet had an impact on headline figures. However, growth has been significantly supported by high rates of consumer activity, driven by increased borrowing. While the low rates of interest mean that there is little problem from rising defaults at this stage, compression in real wage growth may constrain further expansion in consumption in 2017.
In the US, the Dow Jones Industrial Average passed the historical level of 20,000. The 20,000 mark is more symbolic rather than fundamentally significant, as investors prefer to watch the progress of the broader S&P 500 index. However, the achievement is another indication of the strength of the US equity markets. The Dow is now up over 200% from the lows seen in 2009. The recent rally in share prices has been driven by optimism over future economic growth following the election of Donald Trump. However, with the latest figures from the US showing that GDP growth for 2016 was 1.6%, with a slowdown in the fourth quarter, this puts even greater pressure on the President’s policies to meet expectations.
Supermarket giant Tesco announced last week that it was planning to undertake an unequal merger with wholesaler Booker for an equivalent cost of £3.7bn. The market received this information well with both Tesco and Booker shares rising by over 10%. This indicates that the market believes that there are significant synergies between the businesses. With significant movements in equity and currency markets as well as historically low debt costs, merger and acquisition activity is likely to increase over the coming year. Notably, foreign interest in UK companies is expected to remain elevated.
|UK 10 Year Gilt Yield||1.407||1.493||0.086||6.11%|
The Bank of England and Federal Reserve are making interest rate decisions on Thursday and Wednesday respectively. US employment data will be released on Friday.