UK/Euro Financial Market Daily Evening Briefing 05-06-2007

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London shares close lower; NY weak; InterContinental Hotels Group down
 
Leading shares closed lower and off session highs as Wall Street was softer with InterContinental Hotels Group down on fading bid rumours. By close, the FTSE 100 index was 31.3 points lower at 6,632.8, with the FTSE 250 index 69.2 points down at 12,066.2. Volume was solid, with 2.97 bln shares changing hands in 547,023 deals.
   
By London's close, Wall Street remained lower after comments from Federal Reserve chairman Ben Bernanke and a strong reading on the US service sector suggested the central bank has little reason to lower interest rates.
   
The Dow Jones Industrial Average was 57.1 points weaker at 13,619.1, the Nasdaq Composite index was 8.22 points lower at 2,609.97, while the broad-market Standard & Poor's 500 fell back 5.1 points to 1,534.08.
   
In US economic news, the nation's service sector expanded at a faster-than-expected pace in May, suggesting it could be a driver for broader economic growth as the automotive and housing industries slump.
   
The Institute for Supply Management, based in Arizona said its index of business activity in the non-manufacturing sector was 59.7 in May. The reading was higher than April's reading of 56 and Wall Street's expectation of 56.
   
Elsewhere, Bernanke said on Tuesday growth in the world's biggest economy is likely to improve to a "moderate" pace in future months following a pronounced slowdown at the start of the year.
   
Turning to the UK markets, on the blue chip downside, InterContinental Hotels Group was the top faller, 43 lower at 1,370, after chief executive Andrew Cosslett yesterday played down the attractiveness of hotel groups for private equity groups at a hospitality conference taking place in the US.
   
A spokesman from the company said "our focus is on organic growth", we have set out a "target to grow the business by 50,000 to 60,000 rooms on a net and organic basis by 2008".
   
Ex-special dividend factors also weighed on InterContinental. At its last quarter results in May, the group announced it would return 700 mln stg back to shareholders in the second quarter of 2007.
       
Punch Taverns lost 23 pence to 1,343 on profit-taking after recent gains on the back of a Goldman Sachs upgrade last week. Fellow pubs blue chip Mitchells & Butlers eased in sympathy, down 6-1/2 pence at 870-1/2.
   
Tobacco firm BAT dropped 31 pence to 1,687 with peer Imperial Tobacco, down 44 pence at 2,186, also easier on expectations that it could soon raise its offer for Spain's Altadis.
   
Shares in Daily Mail & General Trust fell back 11-1/2 to 836 after Morgan Stanley cut its rating to 'equal-weight' from 'overweight', while nudging up its price target to 850 pence from 820.

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Cadbury Schweppes was 10-1/2 lower at 710-1/4, after the company said it has agreed to sell a number of its non-core businesses for a total of 45 mln stg, adding it remains on track to deliver about 250 mln from the disposals by the year-end.
   
Meanwhile, Bradford & Bingley, the most likely candidate to be replaced in the FTSE 100 index reshuffle tonight, was 2-3/4 lower at 420 with investors waiting to see if Barratt Developments will gain promotion.
   
On the upside, the top blue chip riser was United Utilities, taking on 23-1/2 pence to 796 after the firm announced plans to sell its electricity distribution assets and return cash to shareholders with solid full-year results.
   
United Utilities saw its full-year underlying pretax profit rise 16 pct to 561 mln stg, while pretax profit from continuing operations increased by 52 pct to 676 mln stg.
   
In reaction, Merrill Lynch noted that, given the current appetite for UK infrastructure assets, it is anticipating good demand for United Utilities' electricity distribution asset. However, Merrill Lynch did reiterate its 'sell' stance on the group.
   
The good news in the sector lifted United Utilities' blue chip peer, Severn Trent ahead 7 up at 1,563 ahead of their own full-year results due tomorrow.
   
Insurers were in demand with Standard Life, up 2 pence at 340, after Merrill Lynch raised its ratings on the company to 'buy' from 'neutral' in a review of the UK insurance sector.
   
Merrill Lynch also hiked its stance for mid cap peer St James's Place to 'buy' with its shares up 20-3/4 pence at 457-1/4. Fellow insurer Legal & General also gained, up 0.4 at 154.8.
   
The banking sector was also in demand, after a Royal Bank of Scotland trading update, RBS took on 2-1/2 pence to 640-1/2 after the UK bank, which is vying to buy ABN Amro of the Netherlands, said its earnings for the first six months of 2007 are set to come in slightly ahead of market forecasts.
   
In its trading statement, RBS said the rate of underlying earnings growth for the first half will be "slightly higher" than that implied by the current full-year consensus earnings per share forecast of 72.1 pence.
   
Peers Barclays was up 6 at 738-1/2, Lloyds TSB added 3-1/2 to 579, and Northern Rock was 10 higher at 1,070.
   
Broker comment was the spur to gains in blue chip AB Foods, up 4 pence at 935-1/2, after JP Morgan initiated coverage of the stocks with an 'overweight' stance and a target of 1,160 pence in a review of European food producers. The broker said a recovery in the UK bakery market is expected to provide a rebound catalyst to earnings in the company's Allied Bakeries subsidiary.

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Heading the 250 fallers, Intermediate Capital shares plummeted over 8 pct, or 162 pence, to 1,738 after it posted full-year results. The Mezzanine finance company posted a pretax profit of 224 mln stg for the year ended March 31 2007, against 190 mln stg for the 14 months to March 31 2006, and said it has started the new financial year well.
   
In reaction, Merrill Lynch repeating its 'neutral' stance. The broker noted the company's view that it expects pricing and structures to get worse before they get better, adding that the view is consistent with its own and many other leveraged loan investors. The broker added that the group's investment portfolio at the year end was 1.7 bln stg, lower than its estimate of 1.8 bln.
   
Victrex was 48 lower at 762 after results as currency impact concerns continued. The industrial plastics maker reported an 18 pct rise in first-half pretax profit of 27.1 mln stg despite the negative effects of a weak euro and yen, but said it expects the currency headwind to continue into the second half.
   
IG Group shares dropped 13-1/4 pence to 316-3/4 after a mixed trading update with Merrill Lynch cutting its rating to 'neutral' to 'buy' on valuation grounds.
   
Turning to the airline sector, easyJet shed 38 pence or 6-3/4 pct to 525 after peer Ryanair warned of a sharp slowdown in growth over the coming year with the release of its full-year results.
   
Ryanair said it expects yields to fall by up to 5 pct, with unit costs seen rising by 6-7 pct due in part to longer journey lengths and higher airport charges at Stansted and Dublin, partly offset by lower fuel costs. In reaction, ABN Amro said Ryanair's guidance for full-year 2008 looks to be very cautious and retained its 'hold' stance on the stock. Ryanair shares were down 0.255 eur at 5.10.
   
On the second line upside, Carphone Warehouse took on 18-1/2 pence at 322 after the company reported full-year profits above its previous forecasts The firm reported a near 10 pct drop in its fiscal full-year profits after losing some 70 mln stg in the UK's ultra-competitive broadband market.
       
In reaction, Evolution Securities reiterated its 'buy' recommendation and 360 pence price target on Carphone Warehouse.
   
Elsewhere, FKI was up 2 at 140 on vague bid speculation with rumours GE Capital is mulling a 170 pence a share bid.
   
Shares in Bodycote firmed 2-3/4 pence to 293-3/4 after being upgraded to 'neutral' from 'reduce' by UBS on valuation grounds.

UK Diary of Events

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UK Small Cap Report

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Paris shares down on profit-taking as Wall St dips ahead of ECB meeting

The CAC-40 index ended down 47.27 points or 0.77 pct at 6,078.54, on volume of 6.3 bln eur. Thirty-one CAC-40 stocks closed down, eight were higher and one was unchanged. On the Matif, June CAC-40 futures were trading down 35 points at 6,072.5.
  
EADS was the sharpest loser among blue chips, off 47.27 or 0.77 pct at 6,078.54, after three straight days of gains. The group said it has made rapid progress with its restructuring plan.
   
Shares in Air France-KLM slid 1.50 or 3.92 pct to 36.76 as the market reacted to a warning from low-cost carrier Ryanair its profit growth will slow this year, with investors taking advantage of Air France-KLM's recent rally to claim profits, dealers said.
   
"People are talking about Ryanair," another local dealer said, while also noting that Air France-KLM enjoyed gains last week on the news it is to enter the CAC-40 index later this month.
   
Reporting full-year results this morning, low-cost carrier Ryanair said it expects profit growth to slow in the current year as a result of softening market conditions.
   
Specifically, the company expects lower load rates and lower average fares, as well as higher costs resulting partly from longer journeys and higher airport charges at Stansted and Dublin. Another local dealer conceded that "people are extrapolating Ryanair's warning" and applying it to Air France-KLM.
   
But he cautioned that "Ryanair is just a pretext" for profit-taking on a highly-valued share in a falling market. "Ryanair has nothing like the same business model as Air France-KLM," he stressed. Hermes International, which is holding its AGM today, fell 4.02 or 3.97 pct to 97.33.
   
On the upside, Renault added 0.74 or 0.66 pct at 113., helped by Deutsche Bank's decision to raise its target to 144 eur from 117 with a renewed 'buy' rating.
   
The broker cited the car maker's strong product offensive as well as anticipated reductions in costs, adding the share price may hit the 160 mark in the next two years.
   
Yesterday, fellow broker Societe Generale Securities upgraded its recommendation on Renault to 'buy' from 'hold' and hiked its target to 130 eur from 90 eur, also citing the launch of new models in Europe.
   
Air Liquide climbed 1.32 or 0.73 pct at 182.30 as rumours circulated the chemicals firm might be the target of a leveraged buyout.
   
"The rumour's coming out of Geneva, and we're hearing it's Wendel Investissement because it's placing Bureau Veritas in the market," a Paris-based dealer said. But other dealers didn't lend much weight to the rumour.
   
Another strong gainer on the CAC-40 was Bouygues, up 0.90 or 1.38 pct at 66.02. There were fresh speculation the conglomerate could sell its stake in TF1 in order to fund a potential acquisition of nuclear power group Areva. Bouygues issued a denial regarding the rumour.
   
A London-based analyst, meanwhile, doubted that Bouygues would choose to sacrifice TF1 stake for this purpose, arguing that "TF1 is a really good asset for Bouygues and there are other ways they can raise the necessary cash".
   
Investors will be looking for indications of Bouygues' strategy when the group reports first-quarter results tomorrow morning.

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German shares close lower led by Lufthansa, MAN

The DAX was down 56.96 points, or 0.71 pct, at 7,919.83, after trading between a high of 7,939.61 and a low of 7880.35. The MDAX lost 3.17 points, or 0.03 pct, to 11,158.31. The TecDAX added 3.64 points, or 0.40 pct, to 919.96. DAX futures were down 64.50 points, or 0.81 pct, at 7,928.00, while bund futures lost 0.29 points, or 0.26 pct, to 111.43.
   
Lufthansa lost 0.52 eur or 2.43 pct to 20.87, making it the biggest underperformer on the blue chip board. MAN followed suit, declining 2.49 or 2.25 pct to 108.00.
   
Adidas, down 0.80 or 1.70 pct at 46.20, fell on the back of a report that billionaire sports retailer Mike Ashley has sold his stake in the sports equipment manufacturer to earn at least 43 mln eur, dealers said.
   
Commerzbank ended 0.27 higher or 0.73 pct at 37.27 -- the biggest gainer -- as shares were buoyed by unsubstantiated rumours of a possible takeover bid from US rival Citigroup Inc at 44.5 eur per share.
   
Bayer added 0.17 or 0.31 pct to close at 54.65, partially due to vague rumours of an unnamed bidder possibly mounting a takeover for Germany's largest pharmaceutical company. No specific bidders were mentioned.
   
Traders said, however, the shares were primarily boosted by positive phase III study data on its drug Nexavar, which was released yesterday, that helped push the stock to its highest level since Jan 2001.
   
Henkel gained 0.49 to 117.59 as the stock was reported to be entering Dow Jones Titans sub-indices.
   
TUI lost 0.14 to 20.16 on the back of news that its planned merger with First Choice Holidays PLC has been given conditional approval subject to the German tourism and shipping conglomerate divesting its Irish 'Budget Travel' business.
   
Merck was higher on the mid-cap index MDAX, up 5.47 or 5.54 pct at 104.28, on speculation over its possible entry into the DAX30 index.
   
Patrizia Immobilien was 0.32 lower or 2.05 pct at 15.28 on speculation it would be kicked out of the MDAX.
   
Deutsche Boerse, operator of Germany's DAX and MDAX indices, is meeting today for a composition review and traders said there is growing speculation that Merck may soon be included on the blue-chip index DAX30.
   
Altana -- the stock that Merck would mostly likely replace should a decision be made -- was little effected by the speculation, gaining 0.08 or 0.43 pct to 18.85 as one of the top three DAX30 gainers at the close of trading.
   
Back on the MDAX, Puma gained 0.50 or 0.15 pct to 332.00 as rumours circulated of a possible, but unlikely, counter bid to PPR SA's 330-eur-per-share offer for the sports equipment manufacturer.
   
Conergy was the best performer on the TecDAX, adding 4.06 or 7.18 pct to 6060, as speculation over takeovers in the solar energy industry did the rounds. GPC Biotech, down 0.69 or 3.17 pct at 21.06, was the worst performer on the TecDAX.

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Amsterdam shares lower, tracking Wall Street; mid-cap builders outperform

The AEX closed down 0.94 points or 0.17 pct at 544.75, after opening at 546.00 and trading in a range of 543.59-547.82. Government bonds traded lower and the euro stood at 1.3522 usd versus 1.3488 usd late yesterday.
   
Rodamco Europe led blue-chip decliners throughout the day and closed 3.04 pct lower at 107.72 eur. Dealers said the share's decline was linked to the underperformance of merger partner Unibail on the CAC-40 in Paris.
   
Rodamco's midcap real estate peers also declined on profit taking following yesterday's gains on the heels of bullish sector news in the US. Corio was down 1.97 pct at 64.34 while Wereldhave was 1.12 pct lighter at 106.10.
   
ASML also underperformed, dipping 2.54 pct at 18.80 eur, following mixed performance for the semiconductor sector in the US yesterday after an industry trade group released April sales figures that suggested pricing and shipments were weaker than normal. Fellow semiconductor stock ASMI also declined, giving up 0.41 pct at 19.47 eur before closing.
   
Blue-chip publishing stocks Reed Elsevier shed 1.29 pct at 14.58 but peer Wolters Kluwer closed 0.09 pct higher at 23.20. The staffing sector also suffered, with Vedior weakening 0.87 pct at 21.76 and Randstad dipping 0.85 pct at 59.65 while midcap peer USG People was flat at 34.29.
   
Numico shed 1.08 pct at 36.60 and Unilever gave up 1.08 pct at 22.01 eur while TNT closed 0.37 pct lower at 32.69 amid news that the Dutch parliament has passed a market liberalisation law forcing the postal giant to compete in the market for letters weighing under 50 grams.
   
ABN Amro declined 0.53 pct to 35.79 as investors responded with disappointment to news that the Royal Bank of Scotland, leader of a consortium bent on buying the Dutch bank, has ended talks with Bank of America regarding a dispute about the planned sale of ABN's US unit LaSalle. An agreement between the two parties could have simplified the consortium's bidding battle with Barclays for ABN Amro.
   
Consortium partner Fortis, on the other hand, outperformed in afternoon trade and closed 0.61 pct higher at 31.11. Among other financials, Aegon was off 0.33 pct at 15.20 and ING improved 0.06 pct to 33.215 after announcing the start of its 5 bln eur share buyback programme yesterday.
   
Royal Dutch Shell rose 0.53 pct at 28.43 while the oil sector was lifted by concerns surrounding a cyclone headed for the Middle East.
   
SBM Offshore closed 0.18 pct lower at 27.31 after trading higher throughout the day, while the oil services group's midcap peer Fugro picked up an extra 1.12 pct at 44.41 following a price target upgrade to 49 eur from 46 at ABN Amro on positive market conditions.
   
Chemicals group DSM led gainers at the end of the day, adding 0.92 pct at 38.30 while Heineken was 0.65 pct higher at 43.64 and Arcelor Mittal increased 0.40 pct to 47.12 while the steel giant made news by building up its stake in its Brazilian unit and CEO Lakshmi Mittal said the ongoing merger of Arcelor and Mittal will create jobs in Belgium.
   
Oce led midcap decliners, giving up 3.07 pct at 14.50 while Binckbank slipped 1.53 pct at 14.20, Crucell gave up 0.88 pct at 16.87 and Getronics lost 1.43 pct at 5.50.
   
Dredger Boskalis was off 0.84 pct at 16.87 while market maker Van der Moolen closed 0.98 pct lower at 4.04 after trading higher early in the day on investor hopes for a change in strategy.
   
Midcap construction stocks led gainers for much of the day, with Heijmans rising 1.81 pct at 47.19 and BAM closing 1.11 pct higher at 21.80. The stocks were lifted by on government statistics released yesterday showing an increase in turnover and press reports of construction companies having difficulty finding the manpower and materials to keep up with growth, which caused one Amsterdam-based dealer to remark that "the sector is overheating," he said.

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