UK/Euro Financial Market Daily Evening Briefing 01-11-2007

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London shares close sharply lower; banks hurt by Citigroup downgrades

Leading shares fell sharply, with banks tumbling after analysts downgraded US giant Citigroup, saying the company may have to raise more than 30 bln usd in capital, and Wall Street opened lower.
   
At the close, the FTSE 100 index was down 135.5 points, or 2 pct, at 6,586.1, up from the low of 6,549.7. The FTSE 250 index fell 139.7 points to end the day at 11,526.3. Volume was average, with 2.78 bln shares having traded in 772,310 deals.
   
Analysts at CIBC World Markets said: "Our thesis is simple. We believe (over the near term), Citigroup will need to raise over 30 bln usd in capital through either asset sales, a dividend cut, a capital raise, or combination thereof. We believe such a catalyst will pressure the stock significantly lower."
   
Accordingly, said the broker, it downgraded the shares to 'sector underperformer' from 'sector performer'.
   
Citigroup was also downgraded to 'neutral' from 'outperform' at Credit Suisse, which cited diminished confidence in financial services giant's fundamental prospects over the near- and intermediate term.
   
The firm said in a research note to expect "more aggressive balance sheet rationalisation in the months to come," and to "forget share buybacks". Shares in Citigroup, the world's biggest bank by market capitalisation, fell 7 pct in early trading on Wall Street.
   
As the London markets were closing, the Dow Jones Industrial Average was 200 points lower at 13,729, having surged yesterday following the Federal Reserve cutting interest rates. Meanwhile, the S&P 500 was 20.66 points lower at 1,528.72 and the Nasdaq Composite was down 34.94 points at 2,824.18.
   
The markets were also having to cope with revived inflation fears as crude oil vaulted to a record 96 usd a barrel before easing, and a report from the Commerce Department indicating that consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the US grew in October at the weakest pace since March. 
   
Paul Webb, chief dealer at CMC Markets, said: "The FTSE started the session looking fairly resilient but equity markets have struggled after the release of some worse than expected data from the US. There's also some disquiet that perhaps the Fed should have taken a more aggressive stance over interest rates last night and with US manufacturing continuing to slow the prospect of the economy sliding into recession cannot be ignored either."
   
He added: "It's now going to be a case of waiting for the non-farm payrolls tomorrow before deciding precisely where equities will end the week, but there has to be more than a passing chance that we'll see some kind of rebound off today's selling in the near term."

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Shares in UK banks were badly hit, though some had been lower for other reasons.     
   
The biggest FTSE 100 loser was Northern Rock, which closed 12-1/2 pence, or 6.8 pct, lower at 172, with the Daily Telegraph having reported that advisers to the beleaguered bank are likely to knock on the door of Lloyds TSB, down 14-1/2 at 531, again to try to entice the high street bank into buying the stricken Newcastle-based lender.
   
The next biggest casualty was Barclays, down 32-1/2 at 571-1/2. HBOS fell 29 to 844. Alliance & Leicester fell 38-1/2 to close at 752.  
   
Medical devices supplier Smith & Nephew was the biggest non-financial faller, down 32 at 617-1/2, as the group's third quarter numbers disappointed.
   
Smith & Nephew said EPS in the quarter rose 16 pct to 11.8 cents on revenues of 845 mln usd, up from 679 mln.
   
Investec said that there were no positive surprises in Smith & Nephew results and investors were taking profits.
   
AstraZeneca was 43 lower at 2,330 after the Anglo-Swedish drugs giant reported unimpressive third quarter earnings, and with investors concerned over the ongoing generic competition problems in the drug sector.
   
"There is a clear problem in late stage pipeline products in the drugs sector and the strategic nettle has yet to be grasped" said Jeremy Batstone-Carr of Charles Stanley, who downgraded his view to 'reduce' from 'hold' this morning.
   
Worries about house price weakness hurt housebuilders, in some cases sending them to 12-month lows.  
   
Barratt Developments fell 27-1/2 to 625, Taylor Wimpey was down 9-1/2 pence to 238, while Persimmon fell 39 pence to 1,010.
   
Also on the back foot was Vodafone, down 5.4 at 183.6, with the Financial Times reporting that a Bombay High Court has ruled that the Indian government can continue its investigation into Vodafone that could result in the company paying up to 2 bln usd in taxes.
    
Unilever, up 71 at 1,696, led the group of just seven FTSE 100 risers, after the Anglo-Dutch food and consumer goods group posted third-quarter numbers broadly in line with analysts' forecasts. Collins Stewart maintained its 'buy' rating and 1,850 pence target.

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Financial shares were the biggest casualties among the midcaps. New Star Asset Management ended the day 25-3/4 pence lower at 329-1/4 pence. Stockbroker Collins Stewart was 14 pence lower at 199-1/2. Subprime lender Cattles was 16-1/4 pence down at 324-3/4 pence, a 12-month low.
   
Croda International was 33 pence lower at 634 after the chemicals group said its pretax profit for the nine months to September rose 20 pct, while underlying sales went up 2 pct at constant currency on mix improvements and price increases.
   
The company, however, said underlying sales on an actual currency basis fell 3 pct.
   
Back to earnings news, shares in wealth management company St James's Place initially rose after it said sales for the first nine months of the year rose by 28 pct, and said sales growth for the year as a whole will be towards the top of its 15-20 pct target range. But, a victim of the weaker market, it closed 13-1/4 pence down at 374-3/4.
   
On the upside, a broker upgrade helped shares in Autonomy rise 55-1/2 to 1,038 after Merrill Lynch upgraded the group to 'buy' from 'neutral', with a 1,170 pence target.
   
Merrill Lynch said that for the coming three years, it sees 37 pct compound annual growth rate (CAGR) earnings growth.
   
Also seeing good gains were shares in Randgold Resources, up 53 pence at 1,772, after its pretax profit was unchanged from the year earlier as higher gold sales were offset by rising costs, but said production and costs for the full year are on track.
   
Enodis was 5-3/4 pence higher at 215 on takeover speculation.  

Diary of Events

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UK Small Cap Report

For a summary of today's trading on the FTSE 250 and the AIM, click here

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Paris shares end lower after US co news adds to economic growth fears

The CAC-40 index closed 117.03 points or 2.00 pct lower at 5,730.92. All 40 CAC-40 stocks closed lower. The euro was at 1.4465 usd, compared to 1.4425 usd at 12.30pm. Losses in morning trade on Wall Street added to the downward momentum as investors took yesterday's Federal Reserve warning about inflation on board.
   
In Paris, share prices fell sharply in afternoon trade after a morning with little activity thanks to a public holiday in France and little newsflow.
   
Shortly after 1 pm Paris time, news emerged that CIBC World Markets had downgraded Citigroup to sector underperformer on the grounds that the US investment bank will need to raise over 30 bln usd in capital in the near term to cover extensive losses.
   
Analyst Meredith Whitney said that the group could be moved to cut dividends, sell assets or raise capital to cover the shortfall, and added that these moves will "pressure the stock significantly lower".
   
The news was closely followed by a negative earnings surprise from oil giant Exxon Mobil, which unveiled lower than expected third quarter earnings of 9.41 bln usd.
   
"It's the straw that breaks the camel's back," a Paris-based dealer commented. The news, combined with record high oil prices and comments from Credit Suisse which more or less indicated that it has little visibility over future results, is sending jitters through the market, he said.
   
"The financial sector is clearly not out of the woods yet, and this holds negative implications for the future financing of the economy...the market is clearly worried that we're not going to see the same rates of economic growth going forward," he commented.
   
In the CAC-40, banking stocks bore the brunt of the losses. Dexia saw the worst losses, closing 1.63 or 7.37 pct lower at 20.50. BNP Paribas closed 3.09 or 4.06 pct lower at 73.00. Societe Generale ended the session 3.15 or 2.72 pct weaker at 112.71 and Credit Agricole was 0.74 or 2.71 pct lower at 26.55.
   
The bearish sentiment also hit stocks seen as having high levels of exposure in the US. Capgemini fell 1.35 or 3.07 pct to close at 42.65. And Alcatel-Lucent lost 0.36 or 5.37 pct to close at 6.34 as initial optimism over yesterday's results and job-cuts subsided, and concerns over the group's poor fundamentals, and fears over its exposure to a US slowdown came to the fore once again.
   
In a research note today, Societe Generale analysts commented that the group made downbeat comments yesterday on the outlook for growth in its market, which casts doubt over its sales forecasts.
   
Oil related stocks also took a hit from the Exxon Mobil news. Vallourec was down 4.46 or 2.23 pct at 199.60 while Total lost 1.44 or 2.59 pct to close at 54.21.

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German shares close markedly lower following lower Wall Street opening

The DAX closed 138.37 points or 1.73 pct lower at 7,880.85 after trading between a low of 7,853.76 and a high of 8,038.41 today. The MDAX lost 162.16 points or 1.52 pct to 10,477.85, while the TecDAX rose 0.60 points or 0.06 pct to 1,017.27.
   
DAX futures lost 158 points or 1.96 pct to 7,924, while bund futures gained 0.70 points or 0.62 pct to 113.56.
   
Leading German blue-chips lower, Commerzbank was the worst hit by the negative news on peer Citigroup, dropping 1.35 eur, or 4.61 pct, to 27.93.
   
Peer Deutsche Postbank followed, down 1.87 eur, or 3.71 pct, at 48.59, while Hypo Real Estate shed 1.28 eur, or 3.12 pct, to 39.73 and Deutsche Bank lost 3.18 eur, or 3.45 pct, to 88.87.
   
Volkswagen shares retracted 5.08 eur, or 2.57 pct, to 192.82, after Commerzbank downgraded its stance on the automaker to 'reduce' from 'hold' while simultaneously raising its target to 170 eur per share from 133 largely on valuation grounds as it said there is no room for growth above VW's share price at the moment.
   
Being one of only three companies bucking today's negative trend, Deutsche Boerse climbed 5.66 eur, or 5.20 pct, to 114.56, after investors cheered record-setting third-quarter figures the German stock market operator released last night.
   
"The excellent cost discipline over the third quarter might be one of the things that really helps the stock out today," said a Frankfurt-based trader.
   
Shares in MAN AG were up 0.53 eur, or 0.43 pct, at 123.73, after several brokerages raised their price targets for the heavy manufacturer's stock on the back of strong third-quarter results it posted yesterday.
   
Henkel gained 0.05 eur, or 0.43 pct, to 35.28.
   
Over on the MDAX, Kloeckner & Co lost 1.85 eur, or 5.05 pct, to 34.80, as the worst performer on the index. At the other end, Hugo Boss led a group of seven advancers, gaining 1.08 eur, or 2.31 pct, to 47.79.
   
TecDAX-listed Solon was up 3.80 eur, or 4.38 pct, at 90.53, as it benefited from continued strong demand for solar stocks.
    
GPC Biotech, meanwhile, fell 0.21 eur, or 6.52 pct, to 3.01 after Goldman Sachs cut its rating on the drug company to 'sell' from 'neutral' and slashed the target to 1.37 eur from 12.50, following the company's announcement of disappointing trial results for a key drug.

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Amsterdam shares close lower as banks slide; Corporate Express surges

At the close, the AEX was 6.39 points or 1.26 pct lower at 540.92. Government bonds traded higher, while the euro stood at 1.4464 versus 1.4419 usd late yesterday.
   
ArcelorMittal led the fallers, down 4.03 pct at 53.15, followed by Belgo-Dutch bancassurer Fortis which lost 3.44 pct to 21.31. Staffing company Vedior dropped 3.38 pct to 15.13 and real estate group Unibail-Rodamco was 3.23 pct lower at 166.07.
   
Telecoms group KPN slid 2.69 pct to 12.67 and ING dipped 2.26 pct to 30.34. Navigation device maker TomTom was down 1.29 pct at 54.35.
   
Tele Atlas, which added 1.93 pct to 42.70, said the 2.3 bln eur takeover offer from Garmin is superior to the 2 bln offer from TomTom and that it intends to support and recommend Garmin's offer. Tele Atlas said under the initial takeover agreement signed with TomTom in July, TomTom has a right to match a superior proposal within five business days.
   
At the other end of the blue-chip index, Corporate Express soared 7.17 pct higher to 8.22, with takeover rumours pushing the stock higher.
   
"There are rumours that Staples is interested," an Amsterdam-based trader told Thomson Financial News, adding that this "causes the imagination to go a long way". He said it was too early to speculate on the financial details of a possible deal. A spokeswoman for Corporate Express declined to comment on whether the group had been approached by Staples.
   
Unilever added 4.15 pct to 23.40 after the group reported third-quarter results which were at the upper end of market expectations and said it is confident of achieving its 2007 targets.
   
Among midcap stocks, Aalberts rose 0.54 pct to 16.70 after the industrial supplier said it acquired Polish company HydroPlast, a producer of plastic systems for sanitary and central heating, for an undisclosed sum. Stork dropped 1.49 pct to 46.27.
   
The group said Fokker Elmo, a division of its Aerospace unit, has signed a contract with the Aegean Free Zone Development & Operating Company (ESBAS), to set up a new wiring systems factory for the Aircraft and Engines department in Izmir, Turkey for 12 mln usd.

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