UK/Euro Financial Market Daily Evening Briefing 24-10-2007

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London shares close lower; Wall Street slides after Merrill's big write-down

UK blue chips reversed earlier gains to close lower, tracking Wall Street's sharp decline as Merrill Lynch's big write-down raised concern over other banks' exposure to the credit markets.
   
At the close, the FTSE 100 index was down 32 points to 6,482, dropping from a midafternoon high of 6,550.9, and recovering slightly from a late afternoon low of 6,460.9, with the FTSE 250 index weaker too, down 80.6 points at 11,278.5.
   
Volume was firm, with 2.65 bln 619,262 deals.
   
In the US, Wall Street plummeted in opening deals, after Merrill Lynch was forced to book a larger-than-expected 7.9 bln usd writedown because of its exposure to the sub-prime market, with Fitch and S&P both cutting their ratings on the investment bank.
   
By the London close, the Dow Jones Industrial Average had slipped 147.5 points to 13,528.8. The Standard & Poor's 500 index dropped 21.45 points to 1,498.15, while the Nasdaq composite index lost 63.08 points to 2,736.18.
   
Turning to UK equities, GlaxoSmithKline shares were lower at the finish, down 11 pence at 1,248-1/2, after the drugmaker said third-quarter pretax profits fell from 2 bln stg to 1.8 bln after a downturn in sales of its
blockbuster diabetes product Avandia.
   
Avandia third-quarter sales fell more than expected, from 378 mln to 225 mln stg -- a 38 pct decline -- against analyst predictions of 265 mln.
   
Losses were also seen in fellow drug company, AstraZeneca, which ended down 49 pence at 2,408-1/2, as Merrill Lynch cut its rating to 'sell' from 'neutral', saying that Astra has the worst pipeline and slowest EPS growth of any of the companies it covers in the sector.
   
Reckitt Benckiser closed lower too, nearly 5 pct or 140 pence down at 2,728, following today's results.
   
Earlier, the Anglo-Dutch household products group reported third-quarter sales growth which was at the top end of expectations.

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Jonathan Newman from Brewin Dolphin said this was well-anticipated by the market place, while pointing out that margin EBIT came in worse than expected.
   
However, he said that in a post-results conference call, chief executive Bart Becht emphasised repeatedly that the modest reduction in margins was a consequence of marketing spending on new product launches, for example Nurofen Express, and Air Wick.
   
Newman said that once this was explained at the conference call, it became clear there weren't any problems, and what the market is seeing from the shares now is just a slight wobble.
   
Weakness was also seen among miners. Kazakhmys led the fallers at the finish, down 108 pence at 1,377 after its third-quarter update, which prompted Seymour Pierce to downgrade its stance to 'underperform' from 'hold'.
   
The broker said the miner suffered a number of production setbacks in the quarter and, notwithstanding high copper prices, believes the company may need to spend more to improve its operating performance than perhaps previously anticipated.
   
Negative broker sentiment helped send BHP Billiton shares lower, ending 64 pence lower at 1,741, with Goldman Sachs cutting its rating to 'neutral' from 'buy', expressing some disappointment with yesterday's output statement.
   
On a brighter note, at the close, BAE Systems headed the blue chip leaderboard, up nearly 4 pct or 16-1/2 pence at 507, gaining in anticipation of the imminent signing of a Eurofighter contract with the Saudis, according to John Clarke from Brewin Dolphin.
   
Rolls Royce shares also pushed higher, up 13 pence at 546.
   
Elsewhere, robust first-half numbers lifted shares in Home Retail Group, which ended 6 pence ahead at 393, with the Argos high street catalogue and Homebase DIY retailer reporting a 40 pct increase in first-half earnings, driven by a "particularly good" result at Argos.
   
Merrill Lynch noted that the results came ahead of consensus and its own estimates, and reiterated its 'buy' rating, while Panmure Gordon upgraded its rating to 'buy' from 'hold', while raising its target to 450 pence from 400 pence.

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Carphone Warehouse was also a good gainer, finishing up 6 pence at 336-1/4, as brokers Daniel Stewart and Collins Stewart both reiterated 'buy' ratings on the mobile phone retailer, saying they are impressed by its deal to use Vodafone's network to expand its offering.
   
Strength was also seen in insurer Friends Provident, which closed 2.4 pence ahead at 175.5 as Resolution, the company with which it is due to merge, ended down 11-1/2 pence at 706-3/4, with the companies saying today they are targeting a 1 bln stg return of capital to shareholders in both 2008 and 2009 following the merger.
   
Fellow insurer Aviva also closed higher, up 2-1/2 pence at 704.
   
On the second line, among the fallers, Brixton ended 1-3/4 pence lower at 343-1/4, following a Morgan Stanley downgrade to 'underweight' from 'overweight', along with a target cut to 300 pence from 550, in its review of the property sector.
   
Turning to the gainers, bid speculation provided a boost to UK oil services group Cairn Energy, which led the gainers at the close, up 144 pence at 2,413, as rumours do the rounds of a takeover approach from BP.

Diary of Events

For a diary of key financial and corporate events in the UK this week, click here

UK Small Cap Report

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

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Milan shares end lower as Wall Street opens down, Generali offers support

Milan shares retraced earlier gains in sustained volumes to close lower after Wall Street opened sharply down, with Generali well bid on the back of M&A speculation.
   
The Mibtel index was down 0.53 pct at 30,695 points and the S&P/Mib fell 0.36 pct to 39,280. Volume traded was an estimated 8.018 bln eur.
   
Generali was up 2.7 pct at 31.2 eur in big volumes following reports UK activist fund TCI has criticised the insurer's governance rules, triggering M&A speculation. "The management team does not appeal to many investors who are applying pressure for Generali to invest its capital in a big deal with the names of Prudential and Aviva going round as possible targets," a dealer said.
   
Generali CEO Giovanni Perissinotto said TCI made no formal requests regarding governance issues. However, after markets closed Generali shareholder Algebris Investments sent a letter, attacking Generali corporate governance.
   
Alleanza, which is controlled by Generali rose 0.72 pct to 9.13 eur.   

Mediobanca, which owns 15.67 pct of Generali, was up 1.66 pct at 15.33 eur. On Saturday Mediobanca will release Q1 results which analysts see rising at the operative level.
   
STMicro was the main gainer of the day, up 4.99 pct at 11.94 eur after a solid set of results and upbeat guidance for the fourth quarter. Natixis raised its rating on the stock to 'buy' from 'add'.
   
Fiat underperformed, falling 4.35 pct to 22.0 eur despite firm Q3 results and an increasing 2007 forecasts with a commitment not to cut 2008 targets. A dealer said the after recent strong results at Fiat's CNH unit, the market was expecting more bullish comments. "That said, a lot of the fall is down to profit taking after recent gains and a weak US market," he said.
   
Unipol fell 1.59 pct to 2.47 eur while BPM fell 0.98 pct to 10.19. BPM said conditions do not currently exist for exclusive talks with any of the potential merger candidates which, aside from Unipol, include BPER and Credit Mutuel.
   
Parmalat was down 2.0 pct at 2.54 eur while Fastweb fell 1.99 pct to 32.96.

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German shares close down on weak Wall Street, banking shares decline

The DAX closed down 13.83 points, or 0.18 pct, at 7,828.96 after trading between 7,807.99 and 7,861.27 today. The MDAX dropped 110.42 points, or 1.05 pct, at 10,423.79, while the TecDAX lost 7.37 points, or 0.75 pct, to 976.94. DAX futures were down 45.50 points, or 0.57 pct, at 7,887.50, while bund futures were up 0.41 points, or 0.36 pct, at 114.12.
  
Financial stocks fell sharply after Merrill Lynch said this summer's credit crisis triggered a bigger-than-expected 7.9 bln usd write-down during the third quarter, causing credit fears on both sides of the Atlantic to re-emerge.
   
Deutsche Postbank dropped to the bottom of the DAX, losing 1.49 eur or 2.94 pct at 49.26.
   
Commerzbank followed, losing 0.81 eur or 2.76 pct at 28.54. Chief executive Klaus-Peter Mueller recently said the bank's previously forecast 80 mln eur of write-downs for sub-prime losses will probably prove to be too low.
   
Hypo Real Estate Holdings declined 0.71 eur or 1.73 pct to 40.30, while Allianz fell 2.64 eur or 1.71 pct to 152.02. Traders pointed to the fact that Allianz's Dresdner Bank unit has not disclosed its exposure to sub-prime related investments.
   
On Aug 3, Allianz's chief financial officer Helmut Perlet said the group's total sub-prime exposure amounts to 1.7 bln eur. Earlier this month, he said Dresdner Bank's third-quarter results will be weighed down by the recent turbulence on the credit markets, without disclosing further details.
   
TUI was also amongst today's five largest decliners, dropping 0.46 eur or 2.32 pct to 19.35. At the other end, Deutsche Boerse added 4.64 eur or 4.57 pct to 106.22 as today's biggest winner.
   
Volkswagen added 2.82 eur or 1.66 pct to 172.55 as they rebounded from recent losses and were buoyed by positive sector valuations stemming from comments at the Toyko Auto Show.
   
Daimler gained 1.06 eur or 1.45 pct to 74.30 as dealers pointed to speculation of new major investors interested in acquiring stakes in the automaker, and as investors took positions ahead of the automaker's release of third-quarter figures.
   
Daimler has been contacted by large investors interested in acquiring a stake in the German car maker, chief executive Dieter Zetsche told Manager Magazin in an interview to be published tomorrow.
   
RWE added 1.51 eur, or 1.62 pct, at 94.55, after Goldman Sachs and Societe Generale upgraded their recommendations on the utility company on the back of expectations of higher power prices in Germany. Peer EON also rose 1.76 eur or 1.34 pct to 133.12.
   
Over on the MDAX, Praktiker dropped to the bottom, losing 1.34 eur or 5.13 pct to 24.80 as traders spoke of possible profit-taking after the do-it-yourself store chain released third-quarter figures which were slightly better than analysts' expectations.
   
At the other end, Gagfah added 0.30 eur or 2.38 pct to 12.92. TecDAX-listed Pfeiffer Vacuum declined 4.94 eur or 7.66 pct 59.51, while Versatel added 0.20 eur or 1.69 pct to 12.05.

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Amsterdam shares close lower; Randstad tumbles

The AEX closed 3.03 points or 0.55 pct lower at 543.34. Government bonds traded higher while the euro stood at 1.4207 usd versus 1.4243 usd late yesterday.
   
Staffing company Randstad led the decliners, down 8.01 pct at 38.22 after opening stronger this morning, with investors concerned over a slowdown in sales growth at the company's German operations as it presented third-quarter figures, analysts said.
   
In a client note, Petercam said it expects the stock to remain under pressure today as analysts lower their forecasts further.
      
Peer Vedior fell 4.46 pct to 15.84 ahead of third quarter results due tomorrow. The group is expected to post a solid set of figures, but analysts were cautious, arguing that the sector remains volatile.
   
Akzo Nobel dropped 2.89 pct to 55.50 after JP Morgan cut its rating on the issue to 'neutral' from 'overweight', according to dealers, and reduced its target to 67 eur from 68, after the company's third-quarter results yesterday.
   
Ahold slid 2.74 pct to 10.63. The group is expected to report solid figures in its third quarter sales update, released tomorrow, but markets are keen to find out whether the supermarket holding company's focus programme at its US operations is working out.
   
Fortis dropped 1.99 pct to 21.74 and ING fell 1.03 pct to 30.86.
   
Industrial supplier Hagemeyer lost 1.03 pct to 4.82. The company said it has appointed Paul Zekhuis as chief operating officer, with immediate effect. The group refused to comment on rumours that it has been approached by French peer Rexel with a hostile takeover bid. Rexel also declined to comment on rumours that it has secured funding for the bid.
   
At the other end of the index, TomTom soared 8.73 pct to 61.75 as the market welcomed the company's operating profit and gross margins in its quarterly results.
       
Binckbank was amongst the strongest midcap gainers, rising 1.60 pct to 15.22 after the online bank released strong nine-month earnings.
       
Engineering group Stork was 1.04 pct lower at 46.82 after it reported lower-than-expected third-quarter results, partly due to the performance of its Aerospace Industries unit.

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