Rising Rates and Rising Stocks Can Awaken a Sleepy Business Market: Morning Brief

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Wednesday 3 August 2022

Today’s newsletter is from Brian Cheung, host and journalist covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

Dealmaking is in crisis this year, but signs of a possible market bottom could push some companies to buy while prices are low.

The catalyst: A stock market that has bounced around 10% from its June lows, creating optimism among investors that the worst of 2022 may be over.

And, of course, the continuing interest rate hikes by the Federal Reserve.

Big deals have been a key feature in the headlines in recent weeks: Amazon (AMZN) plays for One Medical (ONEM) and JetBlue’s (JBLU) struggles to acquire Spirit Airlines (SAVE) serving as just two examples.

OAKLAND, CALIFORNIA - JULY 28: A Spirit Airlines plane prepares to take off from Oakland International Airport on July 28, 2022 in Oakland, California.  JetBlue Airways has announced plans to buy low-cost airline Spirit Airlines, a merger that would create the fifth largest airline in the United States.  (Photo by Justin Sullivan / Getty Images)
A Spirit Airlines plane prepares to take off from Oakland International Airport on July 28, 2022 in Oakland, California. (Photo by Justin Sullivan / Getty Images)

A handful of deals emerged this week as well.

Toronto-Dominion Bank (TD) announced on Tuesday that it would buy investment banking firm Cowen. And Estée Lauder (EL) is reportedly in talks to buy fashion house Tom Ford.

“There is a sense that prices have fallen and that there is some value to be gained, particularly if you are in the market for something that is a major strategic acquisition,” said Marc Kushner, head of US M&A practice at Dorsey & Whitney law firm.

Another factor: interest rates.

As the Federal Reserve raises funding costs to tame inflation, companies fear it will cost them more to finance transactions the longer they wait. Kushner told Yahoo Finance why the Fed rate hikes happened so fast that companies were worried about stalling deals for up to a week due to rate volatility.

“You may or may not be at the bottom of the stock market, but the low interest rates have already disappeared and it will only get worse in the short term,” Kushner said.

However, the volume of business in the first half of this year is well below the previous two years. According to KPMG data, companies around the world have signed around 24,000 deals worth a total of around $ 1.8 trillion.

This compares with more than 32,000 transactions in both the first and second half of 2021, with an overall transaction value exceeding $ 2.6 trillion in each period.

KPMG's mid-year report on mergers and acquisitions found that global deal business is progressing more slowly than in the past two years.  For companies specifically based in the United States, 6,085 agreements were signed in the first half of the year (worth approximately $ 827 billion).  (Source: KPMG, CapIQ, Refinitiv, Pitchbook)

KPMG’s mid-year report on mergers and acquisitions found that global deal business is progressing more slowly than in the past two years. For companies specifically based in the United States, 6,085 agreements were signed in the first half of the year (worth approximately $ 827 billion). (Source: KPMG, CapIQ, Refinitiv, Pitchbook)

An uncertain economic outlook, clouded by inflationary pressures and a war in Ukraine, sidelined many buyers who would otherwise have been happy to put capital into deals.

However, KPMG noted that there is pent-up demand for deals. About 80% of business leaders surveyed in the US say their appetite for deals is “as strong or stronger” than in 2021.

Private equity firms and activist investors, for example, are already eating away from lower prices due to the 2022 stock market spill. In the first half of this year, acquisition funds have announced or finalized deals to about $ 110 billion to grab public companies and make them private.

In Elliott Investment Management, lower stock prices may have allowed the Paul Singer-led fund to take stakes in Pinterest (PINS) and PayPal (PYPL), both of which have suffered heavy losses since late 2021.

And if the stock market rebound continues and the mood among investors continues to improve, trading efforts to confront an aggressive Fed could only be accelerated.

What to watch today

Economic calendar

  • 7:00 ET: MBA Mortgage Applicationsweek ending July 29 (-1.8% the previous week)

  • 9:45 am ET: Global PMI of US S&P servicesfinal in July (47 expected, 47 in the previous month)

  • 9:45 am ET: S&P Global US Composite PMIfinal in July (47.5 during the previous month)

  • 10:00 ET: Factory ordersJune (1.2% expected, 1.7% in previous month)

  • 10:00 ET: Factory orders excluding transportJune (1.7% in the previous month)

  • 10:00 ET: Durable goods ordersJune final (1.9% expected, 1.9% in previous month)

  • 10:00 ET: Durable goods excluding transportJune final (0.3% in the previous month)

  • 10:00 ET: Non-defensive capital goods orders, excluding aircraftJune final (0.5% in the previous month)

  • 10:00 ET: Shipments of non-defensive capital goods, excluding aircraftJune final (0.7% during the previous month)

  • 10:00 ET: ISM Services Index (53.5 expected, 55.3 during the previous month)

I earn

  • Amerisourcebergen (ABC), Allegiant Travel (ALGT), Allstate (ALL), Booking Holdings (BKNG), Biomarin Pharmaceutical (BMRN), Borgwarner (BWA), Cars.com (CARS), Civitas Resources (CIVI Clorox (CLX), CVS Health (CVS), elf Beauty (ELF), Energy Transfer (ET), Fate Therapeutics (FATE), Fastly (FSLY), Fortinet (FTNT), Cedar Fair (FUN), GoDaddy (GDDY), Genco Shipping & Trading (GNK )), Generac Holdings (GNRC), Hostess Brands (TWNK), Host Hotels & Resorts (HST), McKesson (MCK), MercadoLibre (MELI), MGM Resorts International (MGM), Moderna (MRNA), Marathon Oil (MRO) , MBIA (MBI), MetLife (MET), Monster Beverage (MNST), New York Times (NYT), Novavax (NVAX), Realty Income (O), Pacific Biosciences of California (PACB), PDC Energy (PDCE), Qorvo (QRVO), Sturm Ruger & Company (RGR), Sunrun (RUN), Stratasys (SSYS), STORE Capital (STOR), Under Armor (UAA), Western Union (WU), Yum! Brands (YUM)

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