Market Commentary | ‘Tis the Season (to be Volatile)

Many market participants are away in August and liquidity is reduced, bringing overall trade volumes down

August is typically a tough month in financial markets – many market participants are away and liquidity is (further) reduced, bringing overall trade volumes down. But with multiple issues coming in and out of the market’s spotlight (think US and UK interest rates, the oil glut, Brexit, earnings, the upcoming US presidential election) volatility generally goes higher.

The S&P 500 reached an intraday all-time high on Monday led by tech stocks such as Apple and Google-parent Alphabet, but good news was in short supply elsewhere in the US and in Europe after a promising start to the month in Asia. The latest round of European banks stress tests saw the Euro STOXX Banks Index fall almost 3% - that’s a 31% drop for the year.

Unsurprisingly, Italian banks were mostly under fire but banks in Ireland, Germany, the UK and the Netherlands also saw significant declines in their capital ratios. Two out of the 51 banks tested by the European Banking Authority had a ratio of core capital to risk-weighted assets (also known as Common Equity Tier 1, or CET1) below the regulatory minimum.

AIB in Ireland had a CET1 of 4.3% while Banca Monte dei Paschi di Siena had a ratio of -2.4%. Another six banks had a ratio below 7.5% and could be subject to more scrutiny by regulators. The data – which reflects a full application of the Basel III standards, shows how much banks’ capital ratios would fall in the face of a prolonged recession and combined bond-market collapse.

In the US, mixed manufacturing indices and a fall in construction spending followed last Friday’s disappointing GDP data. The weaker-than-anticipated numbers prompted market participants to lower the probability of a rate hike this year, even as certain Federal Reserve members – read William Dudley – argue that another rate hike in 2016 should not be ruled out.

Tesla and Verizon – Cash is King

A number of mergers and acquisitions were announced on Monday. Tesla merged with SolarCity, its sister company. Tesla CEO Elon Musk has a majority shareholding in both companies. Tesla shares were trading roughly unchanged but SolarCity fell as the final offer was some $200 million less than what was originally offered. Tesla said the union will bring about significant cost savings for both companies. The deal, which will see Tesla will retain a 93.5% controlling interest in the merged company, is expected to be approved in the fourth quarter.

Verizon has once again pulled out its wallet after buying Yahoo’s core assets last week. This time, it’s paying $2.4 billion in cash to buy GPS vehicle tracking firm Fleetmatics Group plc. Shareholders of the vehicle firm saw a surge of almost 40% in their share price, as Verizon offered $60 per share. Last week’s close was just above $43. The acquisition complements another purchase made by Verizon last Friday. The terms of the deal with Telogis are as yet undisclosed. The California-based company builds software to track commercial vehicles and navigation software used by automakers such as Ford.

The acquisition helps Verizon capture market share in what Verizon Telematics CEO called the "highly fragmented and pretty under-penetrated" fleet and mobile workforce management business. Verizon Telematics also offers its own fleet management service, called Networkfleet. "Both Telogis in the enterprise space and Fleetmatics in the small and medium-sized businesses space have what's widely considered best-in-class technology software platforms, as well as products and services," Irlando said.

Disclaimer:

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.