What is next? An unexpected contraction with a potential consolidation | Calamatta Cuschieri

Déjà vu country crisis looms...

The Gross Domestic Product fell 0.4% in last quarter ending in December 2016, after a growth in the previous quarter. Yes, you might guess which country I am talking about… It is GREECE again. This contraction has put a halt on the country’s growth and therefore adding pressure on Alexis Tsipras, to find a way to unlock bailout funds. The government is trying to legislate further budget cuts, which would enhance the ambitious fiscal surplus targets for 2018 and beyond. If a deal to release further bailout funds is not reached, the country risks another recession and even greater austerity measures. Currently, there is no date set for the return to Athens of the Troika (a European decision group formed by the European Commission, the European Central Bank and the International Monetary Fund.)

PSA / OPEL potential consolidation

Peugeot and Citroen carmakers, the PSA Group is exploring the possibility of acquiring General Motors European business OPEL. This consolidation would create a market share of around 16 percent of the European car market, pushing past Renault becoming the second biggest in Europe after Volkswagen AG. PSA Group is considering a boost in scale and gets access to Opel’s engineering and electric-car technology. Meanwhile, General Motors would come clean and exits from Europe, especially from Opel’s affiliate brand Vauxhall that operates in the UK, especially after the Brexit vote, which weighed on GM’s operations in the UK due to a weaker British Pound.

Both companies have gone through a restructuring in recent years, with GM losing around $20 billion since 2009 closing a factory in Germany, whilst PSA stopped a facility in Paris. With this consolidation would complement PSA’s exposure to the European market but can be challenging to restructure OPEL’s group in Germany. With the news, PSA shares rose over 3.5%, but having European rivals Renault and Fiat Chrysler share price rising as well due to a potential less overcapacity in the European car market.

Market recap

European markets finished the day on a mixed note, possibly, after the US Federal Reserve Chair Janet Yellen said it was on track to raise interest rates at one of its upcoming meetings. The German DAX index inched down 0.02% at session end and the FTSE 100 shed 0.27% mainly due to the dip in the share price of Rolls Royce after reporting a record of £4.6 billion annual loss. Meanwhile, the French CAC 40 was in the green area settling 0.16% higher with the automotive sector and financial sector gains.

Chairwoman Yellen said the Federal Reserve is on course to raise interest rates, though gradually, given the rise in inflation and economic growth. "At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate." Tracking this, US Treasuries suffered on the announcement that a rate hike is imminent, with rising bond yields.

This article was issued by Rodrick Duca, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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.