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Sell commodity currencies on falling oil prices
Oil fall - short RUB and CAD
Yesterday's collapse of oil to a seven-month low clearly punctuates the demise of OPEC in our view. The thin veil of control that markets provided to this dysfunctional committee is no longer. Overhyped production cuts that never really decreased OPEC supply or pushed prices higher, highlighted the group’s ineffectiveness in modern energy markets.
We don’t expect a rapid recovery in oil prices as the weakness remains due to an uncontrollable supply glut over expectations of a global growth slowdown, which is misplaced. Barring a significant event that drains inventory levels, we don’t expect oil prices to climb above $55 this year. In the FX markets, oil-linked currencies have come under heavy selling pressure. Most vulnerable is USDRUB which is nearing its 200d MA around 60.
The fall in oil prices, worries about US-Russia relations and potential for further sanctions along with long RUB positioning and the central bank cutting interest rates suggests a negative outlook for RUB. While CAD sensitivity to crude volatility has declined, the central bank's sudden hawkish rhetoric has focused investors' thinking on monetary policy expectations meaning we could see a reversion of primary driver back to commodities. In addition, the fall in oil will damage outlook for growth and inflation forcing the BoC to reconsider hawkish comments.
Expect rivals to enter Whole Foods acquisition battle
No one should think that Amazon’s (AMZN) innovative play for Whole Foods is a done deal. News of Amazon’s acquisition of the grocer (WFM) for $13.4bn shocked up the grocery industry and sent big box retailers' stocks tumbling. The long-delayed discussion on how online retail could transform traditional grocery is about to be realised. Short sellers had already targeted the Food & Staples Retail sector due to eroding business models and compressed profit margins. The sector’s depressed stock prices has made it a tempting target for visionary companies.
News of Amazon invading the supermarket space, moving from distant competitor into an immediate threat, will force other companies to react. The potential of the acquisition can be debated, yet it’s hard to argue that with Amazon's IT and distribution expertise, there will be further downward pressure on prices and profit margin. This aggressive strategy is unlikely to go unchallenged. Amazon agreed to pay $42 per share, representing a 27% premium above prior day close, under the acquisition agreement. Yet by Monday, the price was already at $43.22 indicating that investors expect other bidders to enter the fray.
While it’s unlikely that any company has the deep pockets to outbid a determined Amazon with a total stock market value of $475 billion, we could see an effort to make the acquisition more costly. Rival bids could come from Kroger Co, Target, Albertson and most likely Walmart. There is also the chance that large private equity firms could enter the fray. Given the Whole Foods board’s fiduciary duty to shareholders, it must consider any realistic takeover offer so offers will get reflected in the stock price (break-up fee would cost Whole Foods $400m). We would go long WFM with a target price of $48, with downside scenario $42 (Amazon’s bid price).