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Coke Buys U.K.'s Costa Coffee Ahead of Labor Day Weekend

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Friday, August 31, 2018

It’s the final trading day before the long Labor Day weekend here in the U.S., so we expect lower trading volume as investors get an early start to beat traffic out of town. Economic and quarterly news for this cycle, in turn, has mostly passed by now, and will pick up again after the holiday, culminating with the next big employment read expected a week from today with the government’s non-farm payroll report and unemployment rate.

After today’s market open, we will see two key (albeit smaller scale) reads on inflation: the Chicago Purchasing Managers Index (PMI) on the enterprise side and the Consumer Sentiment Index for August on the consumer side. Other reads we’ve gotten lately show a steady rise in inflation metrics with relatively low volatility, and we will check to see if this narrative continues with Zacks’ hometown Chicago PMI, which reported 65.5 last time around, and consumer sentiment, which is expected to drop a bit from July’s very high 97.9 read.

Investors will also be checking on news reports regarding a new trade deal with Canada, following last week’s news that the U.S. and Mexico have reached a tentative bi-lateral deal in lieu of continuing with NAFTA, which was originally executed a quarter-century ago. Many analysts feel a tri-lateral deal — including the U.S.’s other NAFTA trading partner, Canada — would be necessary to shore up healthy trade relations going forward.

There is nothing mandatory about the U.S. and Canada reaching a deal today, although it would be nice to close out the week with something concrete. But there is a 30-day window to reach a deal with our #1 trading partner, so while a decision is not imminent, the clock is indeed ticking. Following a satisfactory trade agreement between North American parties, we can then turn our attention toward Europe and especially China.

The biggest new news story this morning comes out of the U.K., where Coca Cola (KO - Free Report) has agreed to buy British coffee retailer Costa Coffee for $5.1 billion. This price is a roughly 20% premium to the closing price of Costa’s parent company, Whitbread, which trades on the London exchange. The coffee retailer has around 3000 stores in 30 countries — none of which are in the U.S.

If it seems an odd pairing for a worldwide American soda company to buy a European coffee retailer, consider that sweetened soda drinks have been flatlining or dropping for companies like Coke. So we see mergers such as PepsiCo (PEP - Free Report) buying SodaStream earlier this month, and the merger between Dr Pepper Snapple and Keurig (KDP - Free Report) bringing in new revenue growth streams to the respective businesses. Coke CEO James Quincey says the Costa Coffee brand has “more room for growth in Europe and Asia.” KO shares are flat in today’s pre-market.

Mark Vickery
Senior Editor

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