France leads gains for stocks; Markets await FOMC minutes

Summary:

• Strong gains seen in European indices

• DE30: Bayer sells animal health unit

• Wall St also firmly in the green

• FOMC minutes due shortly (7PM BST)

 

Equity markets are surging again on Wednesday led by the French FRA40 (+2%). Those gains are followed closely by markets in Italy (+1.8%) and Germany (+1.7%) as investors return to the market among hopes for more monetary and fiscal stimulus. The Eurostoxx 50 has reached its highest level since the start of the month. After declining yesterday the markets have seemingly taken the latest political upheaval in Italy in their stride and are gaining in what is a pretty broad risk-on move.

 

Elanco Animal Health, international company focusing on veterinary drugs, reached an agreement with Bayer (BAYN.DE) on the purchase of animal health unit. Such a move is in line with Bayer’s strategy to focus on core segments like life science and pharmaceuticals. The deal is valued at $7.6 billion and it breaks down to $5.3 billion and $2.3 billion in Elanco stock. Exact stock price will be determined upon transaction closing date but early estimates hint that Bayer may acquire an up to 20% stake in Elanco through the deal. Bayer announced that it will sell the equity stake over time. Once the transaction is completed, Elanco Animal Health will become the second largest company in veterinary drugs business with Zoetis (ZTS.US) being the only bigger rival.

 

One key market to keep an eye on  is the volatility index (VOLX on xStation) which trades inversely to the S&P500. The so-called fear gauge is often seen as a proxy for and has been trading at elevated levels for much of the month. However, there are some signs that this could be subsiding and if we get much more selling in the VOLX then the backdrop for stock market gains will be more sanguine. The volatility index is trading lower by about 5% today and threatening to break below the 61.8% fib retracement of its advance at 17.31.

The economic calendar is pretty sparse today with Canadian inflation data and US Oil inventories of interest to CAD and crude traders but unlikely to have an impact outside of this. This evening sees the release of the minutes from the last FOMC decision and this has the potential to cause some moves, given that the central bank cut rates for the first time in a decade at this meeting. The cut itself was well telegraphed but any insight into the discussion behind the decision and in particular the reasons for the 2 dissenters to vote against it are key aspects to watch. With the release coming less than 48 hours before the eagerly anticipated Jackson Hole speech from chair Powell, the markets will no doubt be keenly attuned to any hints as to what the next likely step will be from the Fed.