Market Overview
Higher than expected inflationary measures have changed the widespread market belief that the Fed would pause its interest rate increases, and the corresponding uncertainty has caused increased volatility in the market. Although some economists still expect a pause at the Fed meeting in June, recent inflationary pressures have led to expectations of future increases, with fed fund futures pricing a 76% chance that rates will be up to 5.25% after the next two Fed meetings. Inflationary fears have been sparked by a larger than expected consumer price increase in April. The CPI rose 0.6 percent and the core CPI rose 0.3 percent in April, surprising economists who had expected both to be 0.1 percent lower. With the latest increase, the core CPI has reached a 2.3 percent increase over the last 12 months, higher than the 2 percent that is seen as a comfort level for the central bankers at the Fed.
The change in interest rate expectations may also be felt in the currency markets. Amid speculation that the Fed may stop tightening policy, the US dollar hit an eight month low against the yuan and one year low against euro recently. The previous increases in rates had helped boost the dollar around 15% versus the euro and yen last year, and a change in the Fed’s policy could lead the dollar lower and decrease capital inflows. A weaker dollar is already helping to narrow the trade gap, as the trade deficit unexpectedly shrunk to $62 billion in March, a seven month low.
M&A Overview
Led by the NYSE Group’s recent stock offering, activity in the securities exchange market continues to heat up. Recently, the NYSE Group, who after its stock offering has a war chest of between $1-2 billion, announced it was in talks with other exchange groups regarding acquisitions. NYSE CEO John Thain has previously stated that the company is monitoring the LSE, Deutsche Boerse and Euronext as it wants to play a “leadership role” in industry consolidation. Now a for profit company, the exchange is under increasing pressure to expand its offerings with more profitable services, such as derivatives and overseas trading.
Meanwhile, the Nasdaq is quickly acting to lessen the likelihood of a LSE-NYSE partnership. After abandoning its recent $4.5 billion takeover bid the Nasdaq has increased its stake in the LSE to 24.1%, pushing it closer to the 25% hurdle that would give it veto power over such actions as passing special resolutions. The most recent shares were acquired for $23.26 per share, a 31% premium over the earlier takeover bid of $17.71 per share.
