UK/Euro Financial Market Daily Evening Briefing 23-01-2008

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London shares close lower; oils suffer; Wall Street falls for sixth day

At the close, the FTSE 100 index was down 130.8 points at 5,609.3, compared with a session high of 5,844.9, and a session low of 5,518.3. The FTSE 250 index fell 119.1 points today to close at 9,493.7. Volume was below average with 2.46 bln shares having changed hands in 867,132 deals.

Motorola today said net profits fell 84 pct in the fourth quarter and warned that the recovery in its struggling handset unit will take longer than expected. The company reported a net profit of 100 mln usd, down from a year-earlier profit of 623 mln, or 25 cents per share. The figures were below analysts' expectations.

Motorola's update follows that of computer maker Apple, which late yesterday also reported below-forecast earnings. Some traders were also disappointed with indications from the Bank of England and the European Central Bank that they are in no hurry to follow the Fed's lead by cutting rates so aggressively.

Tim Hughes, head of sales trading at spread betting firm IG Index, said: "Yesterdays US rate cut euphoria has proved to be short-lived so far, with the market downbeat after last nights speech by Bank of England Governor, Mervyn King. The implication seemed to be that if UK investors were looking for interest rate cuts along a similar scale to the one from the US yesterday, they were going to be disappointed.

"This has left the market focusing back on the broader economic outlook - which for many, despite the interest-rate cavalry riding in yesterday, is still as gloomy as it was at the beginning of the week." As the London markets were closing, the Dow Jones Industrial Average was down 149 points at 11,822, while the S&P 500 was down 24.25 at 1,286.25, and the Nasdaq Composite was 62.86 lower at 2,229.41.

Back in London, oil shares were playing a big part in pushing the FTSE 100 lower. Crude prices fell as the market is unconvinced that yesterday's 0.75 pct rate cut by the US Federal Reserve will be enough to stop demand falling. Brent for March delivery was recently trading 97 cents a barrel lower at 87.48, and had been below 87 usd at one point.

Royal Dutch Shell closed 105 pence, or 5.9 pct, lower at 1,690, while BP was down 23 at 503-1/2, its lowest close in more than three years. BG Group closed 45, or 4.5 pct lower, at 950. Sanford Bernstein downgraded it to 'market perform' from 'outperform'. British Energy was the biggest blue-chip faller, down 30, or 5.9 pct, at 476.

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With metal prices falling for the same reasons, mining stocks were also down, with Antofagasta 19 lower at 582-1/2, and Vedanta Resources falling 62 to 1,605. Rio Tinto fell 136 to 4,159 and BHP Billiton fell 30 to 1,270. ITV fell 3to 70.7, with Bear Stearns having reiterated its 'underperform' stance and saying it expects ITV1 to underperform the ad market.

Meanwhile, Scottish & Newcastle fell back 11 to 735 as Carlsberg and Heineken are thought to have run into due diligence problems as they pore over the British brewer's books before making a formal takeover offer of 800 pence per share, the Financial Times reported.

Defensive stocks were also out of favour after strong runs recently. British American Tobacco was down 94 at 1,708 and Imperial Tobacco was off 88 at 2,212.

ABN Amro came out with a negative note on UK banks, highlighting bad debt problems, and saying that HBOS was especially vulnerable and would have to raise equity. It cut HBOS, Lloyds TSB and Alliance & Leicester to 'sell' from 'hold' while upgrading HSBC to 'hold' from 'sell'.

HBOS closed 27 pence lower at 633; but Lloyds rose 2 to 410; and A&L was the second-biggest FTSE 100 riser of the day, up 28 at 741-1/2. Traders say it remains a bid target.

HSBC rose 15 to 755. Among others on the upside, oil users benefitted from the prospect of cheaper crude. British Airways was the biggest FTSE 100 riser, closing up 12-1/2 at 308-1/2, with Panmure Gordon reiterating its 'buy'. A broker upgraded helped shares in bus and train group FirstGroup to close 20-1/2 higher at 650-1/2 as Goldman Sachs upgraded the group to 'neutral' from 'sell'. Cruise operator Carnival rose 74 to 2,044.

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Looking at the midcaps, a double downgrade from Morgan Stanley sent recruiter Michael Page stumbling 12-1/4 to 229-1/2, as the broker cut its view to 'underweight' from 'overweight' and price target to 165 pence from 550 pence, while rival Hays was given the same downgrade, with shares losing 5-3/4 to 98-1/4.

Jewellery retailer Signet was the biggest midcap faller, down 8, or 11.1 pct, at 64-1/4. The company is heavily dependent on the US, and may even move its listing there. International Ferro Metals closed 10-1/2 lower at 78-1/2 following a trading statement. The company said it is on track to hit a production target of 133,700 tonnes in the six months to June 30.

Davis Service Group was off 20 at 500 as Goldman Sachs cut the group to 'sell' from 'neutral'. On the upside, bookmaker William Hill was up 27-1/4 at 398-1/4, bouncing from recent lows. There were vague rumours that OPAP of Greece, Europe's largest gaming group might be interested in acquiring Hill.

UK Diary of Event:
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UK Small Cap Report:
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Paris shares close sharply down on Wall St, fading hopes of ECB rate cut

The CAC-40 index finished down 205.78 points or 4.25 pct at 4,636.76. Among CAC-40 stocks, four closed higher and 36 closed lower. On the Matif, February CAC-40 futures were trading at 4,680.5. On the broader indices, the SBF-80 index closed down 93.59 or 1.78 pct at 5,177.36 and the SBF-120 ended down 136.98 or 3.93 pct at 3,3347.86. The euro was quoted at 1.4567 usd, versus 1.4616 usd late yesterday.

Paris shares had initially posted sharp gains at the opening, with investors buoyed by ongoing positive sentiment from yesterday's emergency Federal Reserve rate cut, and speculation the ECB was preparing to follow suit. However, ECB president Jean-Claude Trichet quickly put paid to the talk in a speech to the European Parliament, stressing again that the central bank's main task is to control inflation.

While conceding there are risks to the growth outlook, Trichet said the central bank is still working on the assumption that euro zone growth will remain healthy, in line with its "baseline scenario" of growth around its 2.0 pct potential rate in 2008.

Losses in morning trade on Wall Street also weighed on sentiment. US investors displayed scepticism about the effectiveness of the Fed's intervention, while also showing disappointment with corporate results, notably Apple Inc's lower-than-expected forecast for sales growth in its second quarter.

In Paris, oil heavyweight Total helped drag the market down as it shed 2.89 eur or 5.82 pct to 46.78 as crude prices continued to fall amid expectations of an economic downturn. Oil services group Vallourec dropped 5.36 or 4.11 pct to 125.04.

Cyclical stocks like industrial companies were also among the heavier fallers on the back of economic fears. Steel giant ArcelorMittal fell 2.23 or 5.39 pct to 39.11, while engineering firm Alstom gave up 5.54 or 4.20 pct to 126.48. Car-maker Renault gave up 4.07 or 5.29 pct to 72.80, hit by talk of a profit-warning at WestLB.

The broker slashed its earnings forecasts and price target on Renault SA, saying its management may be forced to issue a "profit warning either alongside its first-half results in July or before." Financials were mostly lower, with Societe Generale again suffering from speculation over heavy sub-prime losses to close down 3.42 or 4.15 pct at 79.08.

French weekly Le Canard Enchaine claimed this morning that Societe Generale is set to suffer more than other French banks from the current global financial crisis as most of its risky credit is insured by one US insurer, which is currently facing financial difficulties.

According to a local dealer: "It's clear they're going to announce additional sub-prime writedowns, it goes without saying. When you've got 5 bln eur of exposure to these products and you've only provisioned 230 mln in the third quarter, it's obvious, given what's happened in the fourth quarter, that we're going to see more."

Elsewhere in the sector, insurer Axa fell 1.14 or 4.92 pct at 22.01 and BNP Paribas was off 3.08 or 4.62 pct at 63.57. Franco-Belgian bank Dexia fared better, however, up 0.22 or 1.48 pct at 15.09 14.86, buoyed by overnight news that New York Insurance Department is looking for capital investment for the bond insurance sector and trying to find ways to stabilise the sector.

"The implications are that the monolines are too important (to the US government) to fail and that the main players, at least the top two, Ambac and MBIA, are close to getting the required capital to maintain or regain their rating," said one analyst.

Food maker Groupe Danone fell 2.94 or 5.28 pct to 52.79 as defensive stocks saw profit-taking after performing relatively well in recent weeks. France Telecom slipped 1.26 or 5.29 pct to 22.55.

Among the rare bluechip risers, Pernod Ricard saw buying ahead of its quarterly sales report tomorrow morning, adding 0.26 or 0.41 pct to 63.93. In contrast, rival drinks maker Remy Cointreau was out of favour, tumbling 3.96 or 10.15 pct to 35.040. Remy last week reported weaker trading in the US, where it is much more exposed than Pernod.

Air France-KLM, meanwhile, was lifted by falling oil prices to end up 0.25 or 1.33 pct at 19.10. Outside the CAC-40, Etam Developpement plunged 2.46 or 11.39 pct to 19.14, after the French women's wear retailer said it expects to post a drop in full-year operating profit after reporting lower fourth-quarter sales.

Societe Generale cut its stance on the group to 'hold' from 'buy' and slashed its price target to 20 eur from 65 saying the economy is seen slowing down sharply with the US likely to enter a recession and, if this happens, household consumption will likely not be spared.

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German shares close markedly lower on fading hopes of ECB rate cut

The DAX closed down 330.26 points or 4.88 pct at 6,439.21, with all blue chip sticks in negative territory. The index had traded between 6,384.40 and 6,884.87 points in today's session. The MDAX lost 184.88 points or 2.24 pct to 8,063.94, while the TecDAX was down 20.90 points or 2.78 pct at 730.09 points.

DAX futures fell 375.00 points or 5.45 pct to 6,507.00, while bund futures were up 0.82 points or 0.71 pct at 117.1. The euro traded at 1.4564 usd, compared with 1.4558 in London afternoon trade. Leading the blue chip lower, MAN fell 6.03 eur or 7.24 pct to 77.22 as UBS downgraded the stock to 'neutral' from 'buy' and cut the price target to 85 eur from 140 eur.

Allianz followed, losing 8.18 eur or 6.85 pct to 11.32, as rumours re-emerged its Dresdner Bank unit could face multi-bln eur subprime write-downs. Infineon plummeted 0.42 eur or 6.46 pct to 6.08 eur after its unit Qimonda disclosed Q1 losses on the back of falling prices for memory chips. Qimonda said Q1 EBIT loss was 590 mln eur. Analysts had forecast a loss of 293 mln.

Utilities EON and RWE were down after the European Commission revealed a proposal, under which the power sector will have to pay fully for carbon dioxide credits from 2013 to 2020. EON lost 8.64 eur or 6.78 pct to 118.79 eur and RWE fell 4.82 eur or 5.86 pct to 77.46 eur.

Deutsche Telekom was also amongst the biggest decliners, down 0.90 eur or 6.45 pct ato 13.05. Among outperformers, Deutsche Lufthansa was 0.11 eur or 0.69 pct lower at 15.82 as oil prices declined on concerns the economy's demand is cooling.

On the MDAX, Deutz slumped 0.44 eur or 7.69 pct to 5.28 eur, while Tognum gained 0.59 eur or 3.90 pct to 15.73. TecDAX-listed Kontron fell 0.98 eur or 8.66 pct to 10.33, while Solon added 1.75 eur or 3.63 pct to 49.92.

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Amsterdam shares close sharply lower as Wall St falls

The AEX closed down 16.14 points or 3.73 pct at 417.13, after hitting an intra-day low of 413.48. Government bonds traded higher, while the euro stood at 1.4560 usd versus 1.4629 usd late yesterday.

Fortis led blue chip decliners, falling 6.61 pct to 13.84 eur. Analyst Ivan Lathouders at Bank Degroof said ongoing worries about the stock, such as the integration of Dutch peer ABN Amro's retail banking arm and the group's significant structural credit portfolio, made it susceptible to the general negativity in markets today.

Fellow financial Aegon lost 4.27 pct to 9.63 eur, while ING closed 3.86 pct down at 20.91 eur. Steel giant ArcelorMittal was off 5.06 pct at 39.25 eur. The European Commission said the deadline for its inquiry into steel manufacturer ArcelorMittal's proposed acquisition of Slovak ferro-alloy and cored wire maker OFZ is set for Feb 25. Retailer Ahold was 2.18 pct down at 8.06 eur as JP Morgan cut its target on the stock to 9 eur from 11, maintaining its 'neutral' rating.

Brewer Heineken was off 2.04 pct at 37.95 eur, amid concern about the profitability and the division of Scottish & Newcastle assets between Heineken and Carlsberg should their takeover bid for the UK brewer succeed, market sources said. Separately, consortium partner Carlsberg today said financing for its planned takeover of Scottish & Newcastle is now in place, commenting on a report in the Financial Times that investment bank Lehman Brothers apparently has concerns regarding the refinancing of a bridge loan for the Danish brewer.

KPN slid 3.74 pct to 11.31 eur. The telecom's company said earlier it has bought the SMS Michel mobile phone retail chain in Germany with 200 shops for "tens of millions" of euros. On the midcap, ASMI was off 5.65 pct at 11.70 eur. The company said in a letter to activist shareholder Fursa that it expects to respond to its calls for changes to ASMI's corporate structure by the end of February.

Boskalis Westminster dropped 4.83 pct to 33.12 eur. Brokerage T. Gilissen earlier upped its rating on the stock to 'buy' from 'hold' and raised its target to 50 eur from 46. Unibail-Rodamco was the day's only blue chip gainer, rising 1.19 pct to 145.71 eur.

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