UK/Euro Financial Market Daily Evening Briefing 22-01-2008

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London shares close sharply higher on Fed's 3/4 pct rate cut; US still falls

At the close, the FTSE 100 index was up 161.9 points at 5,740.1, after opening with a 239.5 point slump to 5,338.7, while the FTSE 250 index was up 352.2 at 9,612.8.

In the US, markets joined stock exchanges around the globe that have fallen precipitously in recent days amid concerns that a downturn might spread around the world. The interest rate cut by the Federal Reserve failed to assuage investors fearing a recession in the United States.

By the London close, the Dow Jones industrial average had lost 186.1 at 11,914.2, the Standard & Poor's 500 index fell 21.65 at 1,303.55, while the Nasdaq composite index dropped 54.28 at 2,285.74.

Back in London, the banking sector dominated the leaderboard on hopes a UK rate cut will follow today's decision from the Fed. The sector was given a further boost by broker upgrades.

Morgan Stanley raised its views on HSBC, Royal Bank of Scotland, Lloyds TSB to 'equal-weight' from 'underweight'. Meanwhile, Goldman Sachs upgraded Lloyds TSB to 'neutral' from 'sell' on valuation as the shares approach its 413 pence price target. Lloyds shares added 34-1/2 at 408, RBS rose 30-1/2 to 373-1/4, Barclays climbed 32-3/4 at 453-1/2.

Meanwhile, house builders were understandably encouraged by the rate cut in the US, with Wolseley up 67-1/2 at 757, Taylor Wimpey gaining 11.3 at 195.2, Persimmon up 59 at 817-1/4, and in the midcaps Berkeley Group added 53 at 1,062, while Redrow was 17-1/2 higher at 314-1/4 and Barratt Developments added 37 at 436-3/4.

The rate sensitive real estate investments trust (Reits) sector also benefited. Land Securities Group was 119 higher at 1,619, after the group said high levels of activity have resulted in continued strong performance across all three of its divisions. The group said that it is well placed to ride out the "current challenging environment".

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The news also helped other Reits stocks, with British Land up 60 at 982-3/4, Liberty International 86 higher at 1,047-1/2 and Hammerson 67 firmer at 1,021-1/2.

Elsewhere, Home Retail Group was 24-3/4 higher at 298, as HSBC upgraded the group to 'neutral' from 'underweight' following last week's trading update to reflect the share price correction seen relative to its peers.

IG Group rallied today, up 29-1/4 at 343-3/4, following declines since the financial products provider's interim results last Monday, while Investec upgraded its view to 'buy' from 'hold' on valuation grounds. Meanwhile, a positive trading update from Pearson helped shares rise 50-1/2 to 671.

The group said it expects to report full-year adjusted earnings at or above the top-end of current market forecasts of between 42.0 and 45.5 pence per share. The group is confident in its ability to sustain its financial and competitive progress in 2008.

Among blue-chip fallers, defensive stock Imperial Tobacco was off 98 at 2,300, as its longstanding offer for Altadis has been declared unconditional, after the company broke the 80 pct minimum acceptance threshold required by Spanish regulators.

Imperial said that it had received acceptances representing 93.5 pct of Altadis' issued share capital for the 50 eur per share offer. Sector peer British American Tobacco gave away 30 at 1,802.

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In other commodity news, heavyweight oil stocks ended lower despite the oil price coming off days lows, earlier prices fell to their lowest level for more than a month. Scottish & Newcastle was down 10 at 746 as the group awaits bid developments from Carlsberg/Heineken.

Turning to the midcaps, Southern Cross Healthcare dropped 3.92 pct, or 16-3/4 at 410-3/4, this after the UK care-home operator said its finance director Graham Sizer will step down with effect from Feb 29, and will be replaced by financial controller Jason Lock.

Meanwhile, Northern Rock fell back 4-1/4 at 90 following yesterday's gains on reports by the Daily Telegraph the group is to pay the government up to 400 mln stg as an arrangement fee for providing the lifeline finance package that will allow the troubled mortgage bank to be sold to a private sector bidder.

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Milan shares close higher in volatile trade, led by banks, cements 

The Mibtel index was up 1.00 pct at 25,861 points and the S&P/Mib rose 1.18 pct to 34,302. Volume traded was an estimated 5.988 bln eur. The market rose steadily during the afternoon in reaction to the rate cut.

Brokers said there remains considerable uncertainty on whether there will be a US recession and how long it will last, as well as continuing lack of visibility on subprime exposures. One broker said similar subprime problems are emerging in the insurance sector and these can start weighing on stocks.

Another broker said he sees the Fed making a further cut in US interest rates next week, adding that earnings estimates for companies still have to be cut to take account of slower growth.

Once these earnings estimate cuts have been made, stocks can reach a bottom and start recovering, he said. Political doubts over the Italian government's future are having little impact, given the wider economic worries, brokers said.

In the banking sector, Banco Popolare was up 1.21 pct at 12.93 eur and BMPS rose 0.40 pct to 3.1375 after more details on its planned capital increase. Unicredit was up 0.76 pct at 4.89 after yesterday's sharp loss. Brokers say there is switching into Intesa Sanpaolo, up 0.80 pct at 4.7325. Unicredit is seen more exposed to subprime and related credit market issues.

Brokers said bank stocks reacted mechanically to lower interest rates, and that the sector can still fall in future on earnings downgrades. Among insurers, Alleanza lost 2.02 pct to 8.195 and Generali was up 0.04 pct at 27.99. These stocks had resisted weak market trends in the last weeks.

Lehman in a note on Italian insurance upped both stocks, taking Alleanza to 'overweight', from 'underweight', and Generali to 'equalweight', from 'underweight', citing the latter's operational momentum.

Among cements, Italcementi was up 4.28 pct at 13.45 and Buzzi Unicem up 2.46 pct at 15.48. Lottomatica, up 1.59 pct at 23.60, was among the gainers on positive reports on court decisions, which go some way to lift the threat of massive regulatory fines.

Luxottica added 1.96 pct to 17.78 and Bulgari was up 1.08 pct at 7.505. On the negative side, Atlantia fell 4.45 pct to 21.92. JP Morgan in a note this morning said Abertis will call off the speculated merger of the two companies next week, citing continued regulatory uncertainty.

Alitalia was down 3.93 pct at 0.673. Government officials said privatisation talks with Air France-KLM will continue even if the government falls. Mediaset lost 0.87 pct to 5.72, failing to react to possibility that main owner Silvio Berlusconi can return to power if the centre-left government falls. Brokers said wider economic issues prevailed.

Among utilities, Enel lost 3.44 pct to 7.29 and Telecom Italia fell 3.20 pct to 1.995. Brokers said there was sector rotation in today's session with company news not having much of an impact. Autogrill rose 0.17 pct to 10.70. Milan broker Centrosim started coverage with a 14.3 eur target, citing growth in transport markets and possible acquisitions. Cyclicals were on the downside. Fiat fell 2.57 pct to 15.33. Finmeccanica lost 2.47 pct to 18.57.

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German shares close down, but off earlier lows, as Wall Street recovers

The DAX closed down 20.72 points or 0.31 pct at 6,769.47, having traded between a low of 6,420.71 and a high of 6,877.62 in today's session. The MDAX closed up 308.31 points or 3.88 pct at 8,242.82, while the TecDAX added 25.67 points or 3.54 pct to 750.99.

DAX futures were down 26.00 points or 0.38 pct at 6,801.50, while bund futures declined 0.64 points or 0.55 pct to 116.24. The euro traded at 1.4619 usd against 1.4571 usd in afternoon London trade.

RWE was the biggest loser, falling by 5.36 eur or 6.16 pct to 81.70, while peer EON was off 5.53 eur or 4.16 pct at 127.44, as crude oil prices dropped amid worries that global energy demand could decline due to a possible US economic recession.

Deutsche Telekom was down 0.41 eur or 2.85 pct at 13.98, while Merck KGaA fell 1.60 eur or 1.90 pct to 82.60. Henkel was also among the five weakest performers, down 0.32 eur or 1.02 pct at 30.94. Financial stocks were today's biggest gainers, recovering from heavy losses in the past days following the Fed's decision to cut rates.

Hypo Real Estate - punished by investors in the past days for its surprise announcement last week of 390 mln eur in writedowns in the fourth quarter -- bounced back 1.52 eur or 8.45 pct to 19.50 after. Commerzbank gained 1.47 eur or 7.75 pct to 20.43. Peer Deutsche Bank was 3.39 eur or 4.66 pct higher at 76.08. Stock exchange operator Deutsche Boerse also rose, up 2.90 eur or 2.79 pct at 106.78.

Over on the MDAX, Heidelberger Druckmaschinen added 2.16 eur or 13.45 pct to 18.22 at the top. At the other end, AMB Generali fell 3.34 eur or 3.52 pct to 91.50 as one of only seven mid-cap stocks that ended the day in negative territory.

TecDAX-listed Solon gained 6.02 eur or 14.28 pct to 48.19, while IDS Scheer was down 0.67 eur or 6.26 pct to 10.04. The company released weak full year figures today and did not disclose guidance for 2008.

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Amsterdam shares close sharply higher as Fed rate cut reverses losses

The AEX closed up 10.82 points or 2.56 pct at 433.27, after opening at 404.05 and plunging to an early low of 401.45 before rebounding to a late intraday high of 437.66 at 5.12 pm. Government bonds traded mainly lower, while the euro stood at 1.4629 usd versus 1.4453 usd late yesterday.

SBM Offshore led gainers, up 10.47 pct at 17.83 eur. Heavyweight steel giant ArcelorMittal was up 7.14 pct at 41.26 eur, while Corporate Express added 8.60 pct at 3.79. Ahold gained 5.65 pct at 8.23 eur amid news it is in talks with CVC Capital Partners about a potential sale of its 73 pct stake in Schuitema.

"The plan to sell Schuitema, although unexpected, shows that there are no sacred cows," analysts at ING said. "The dismantling of Ahold continues, leaving only the best of the best companies, especially in case of a successful turnaround at Stop & Shop, which we expect to materialise in the course of 2008/09."

Financials were also among gainers after the heavy losses seen in recent days, with Aegon leading the pack, up 4.57 pct at 10.06 eur, followed by Fortis, up 3.82 pct at 14.66. At the other end of the index, Randstad led decliners as it shed 2.79 pct to 23.66 eur after a downgrade to 'sell' at Merrill Lynch and disappointing Dutch staffing market data.

TNT underperformed the market, closing up 1.12 pct at 24.48 eur after it lodged a lawsuit against the German state in dispute over the alternative minimum wage it pays to German-based workers. DSM added 3.36 pct at 27.35 eur, on read-across following DuPont's maintenance of full-year forecasts, analysts said.

On the midcap, BinckBank surged 12.57 pct to 7.88 eur and Boskalis Westminster jumped 9.09 pct to 34.22 eur amid news it has won a joint venture contract to expand an Australian coal export harbour. Ordina closed up 12.08 pct at 9.00 eur, Aalberts Industries added 11.67 pct at 11.48 eur and BAM was up 11.28 pct at 12.13 eur after it won a 110 mln eur hotel construction contract in Abu Dhabi through its Interbeton unit.

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