UK/Euro Financial Market Daily Evening Briefing 25-01-2008

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London shares close lower after volatile last hour; Wall Street off highs

At the close, the FTSE 100 index was 6.8 points lower at 5,869.0, above the late session low of 5,848.5 but well below the opening peak of 5,973.3.

The broader FTSE indices all ended lower, aside from the FTSE Small Cap index. Volume was fair, with 2.809 bln shares changing hands in 931,946 deals.

On Wall Street, by London's close, the DJIA was up 6.70 points at 12,385.30, while the S&P 500 index was up 0.20 points at 1,352.25, and the Nasdaq composite index ahead 7.75 points at 2,368.67, with all the US indices off earlier highs.

The notion that a hedge fund could face trouble rekindled concerns that the recent stumbles in the financial sector may not be entirely on the mend and dampened the market's enthusiasm over Microsoft's good earnings news released overnight.

In London, financial issues saw a late sell-off which undermined earlier gains as rumours that a hedge fund was liquidating positions in some Benelux stocks and vague talk of profit warnings as well bought the recent sector rally to halt.

Among the banks, Alliance & Leicester, boosted recently by fresh bid rumours, lost 46-1/2 pence to 736 with Lloyds TSB down 14-1/2 pence at 429-1/4, fund manager Old Mutual shed 8.5 pence to 133.2, and with the insurers, Aviva dropped 24-1/2 pence to 623, while Standard Life fell back 7-1/2 pence to 226-3/4.

Housebuilders were also in the doldrums, dropping back after recent gains as UK interest rate uncertainty remains ahead of next month's Bank of England Monetary Policy Committee meeting in spite of this week's US rate cut.

Persimmon was the top blue chip faller, off 61 pence at 826, while Taylor Wimpey was down 11-1/4 pence at 193-1/4, and among the midcaps Berkeley Group shed 86 pence to 1,000, while Redrow dropped 23-1/4 pence to 297-1/2, and Bellway lost 66 pence at 851.

Retailers were also weak as investors remained uncertain about interest rates and conditions on the high street, with Next off 56 pence at 1,375, Home Retail Group down 11-1/4 pence at 278-3/4, and Marks & Spencer down 11 at 434.

Meanwhile shares in Kingfisher were 0.9 pence lower at 141.7 as investors took profits following news the home improvement retailer has named Ian Cheshire as its new CEO.

Cheshire, currently managing director of B&Q -- Kingfisher's biggest and highest profile business -- was considered the favourite amongst analysts to get the job.

On the upside, strength in heavyweight mining issues provided a floor for UK blue chips as the sector rallied again on the back of firmer commodity prices.

Vedanta Resources was the best sector performer, up 123 pence at 1,829,, with Kazakhmys ahead 58 at 1,164, Rio Tinto up 177 pence at 4,969, and Xstrata ahead 107 pence at 3,500.

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The oil majors were also higher as crude prices held above 90 usd as demand worries faded slightly, and after US lawmakers gave details of an economic stimulus package aimed at averting a recession.

BP was up 7 pence at 538, BG Group was 27 pence stronger at 1,030, and Royal Dutch Shell was up 4 pence at 1,803.

Away from commodities, Imperial Tobacco shares topped the FTSE 100 gainers board, up 202 pence at 2,430 as investors continued to celebrate this week's news that the firm's agreed takeover of Spanish firm Altadis has been declared unconditional. Imperial Tobacco also announced today that it will bid for the outstanding shares in Altadis-controlled distributor Logista at 52.5 eur per share.

Elsewhere, Scottish & Newcastle gained 17 pence to 783, after the firm announced today that it had agreed to a recommended offer of 800 pence-per-share from its European peers Heineken and Carlsberg, valuing the UK brewer's issued share capital at about 7.6 bln stg.

And good gains were also seen among travel stocks, with Tui Travel up 4-1/4 pence at 242-1/4, and Thomas Cook 7-3/4 pence higher at 248-3/4, after Lehman Brothers initiated coverage on both as 'equal-weight' and 'overweight', respectively, as part of a sector review.

On the second line, Ashmore Group topped the FTSE 250 gainers board, up 23 pence at 251, boosted by Evolution Securities repeating its 'buy' rating on the firm with a 350 pence price target.

The broker pointed out that Ashmore failing to take part in yesterday's rally took away most of its outperformance against its peer group for 2008.

Evolution said it believes this is wrong and it continues to champion Ashmore as the strongest secular growth play in the asset management sector.

Northern Rock was also among the top mid cap gainers, 7 pence higher at 111, with the Daily Mail reporting that US private equity firm Cerberus is still interested in bidding for the stricken mortgage lender.

And Imperial Energy shares took on 50 pence to 1,499 after a positive update on its Russian Registered Reserves, with Merrill Lynch repeating its 'buy' view and 2,400 pence price target on the stock in response.

Among the fallers, St James's Place was the worst off, dropping 33 pence to 277 after Goldman Sachs downgraded its rating to 'neutral' from 'buy', while cutting its target to 361 pence from 371. St James's Place shares rose sharply yesterday after a trading update.

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Meanwhile, International Ferro Metal shares shed 7-1/4 pence at 81-3/4 on news of a production halt at the integrated ferrochrome producers South African plants.

The group revealed that it has instructed by Eskom, the South African electricity provider, to switch off its two ferrochrome furnaces as part of the provider's request that all industrial electricity consumers reduce their electricity consumption to an absolute minimum.

And Marston's shares lost 16-3/4 pence to 271-1/2 after cautious outlook comments in its AGM statement.

Marston's said sales in the 16 weeks to Jan 19 were 7.9 pct ahead of last year, reflecting the acquisitions of Sovereign Inns, Eldridge Pope and Ringwood Brewery in 2007 but added it remains cautious on 2008 prospects.

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UK Small Cap Report:
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Paris shares close lower, stocks turn negative after Wall Street open

The CAC-40 index finished down 37.17 points or 0.76 pct at 4,878.12. Among CAC-40 stocks, 16 closed higher, 23 closed lower and one was unchanged. On the broader indices, the SBF-80 index closed 70.10 points higher or 1.29 pct at 5,491.86 and the SBF-120 ended 17.56 points or 0.5 pct lower at 3,525.87.

The euro was quoted at 1.4709 usd, versus 1.4717 usd at midday. Building materials group Saint-Gobain led the blue-chip decline, falling 3.44 eur, or 6.18 pct, to 52.22, after publishing in-line fourth-quarter sales figures and giving a cautious outlook for 2008.

"The market has rebounded strongly and Saint-Gobain did particularly well yesterday, so with the group's prudent stance on 2008 it's normal for investors to start pulling out of the share," a local dealer said. Exane BNP Paribas cut its stance on the group to 'neutral' from 'outperform' after the publication of the sales figures, saying short-term risk outweigh the group's long-term potential.

Pointing to the cautious outlook for 2008, Exane analysts said they expect EPS growth to be "modest" in the near term, and commented that Saint-Gobain offers the highest risk of EPS downgrades in the building and construction sector.

The financial sector was also particularly hard-hit, with shares dropping sharply mid-afternoon following Wall Street's open amid new rumours out of the US concerning financial troubles at hedge funds. BNP Paribas fell 2.42 eur or 3.56 pct to 65.50 and Axa lost 0.84 or 3.46 pct to close at 23.46.

Societe Generale remained in the spotlight a day after disclosing an historic 5-bln-eur loss due to what it called fraud committed by one of its traders.

The stock lost 1.94 eur or 2.56 pct, closing at 73.87. L'Oreal rose in early trade after unveiling an impressive set of sales figures for the fourth quarter of 2007, but changed direction along with the wider market after Wall Street's open. The stock finished 1.12 eur or 1.33 pct lower at 82.89.

Tech stocks performed well in the Paris market, buoyed by a strong overnight earnings publication from Microsoft Corp. Capgemini rose 0.73 eur, or 2.06 pct, to 36.10, while Dassault Systemes added 1.54, or 4.47 pct, to 36.00 and STMicroelectronics was unchanged at 8.44 eur.

"(Microsoft's) figures show that demand from businesses remained strong in the second quarter of the 2007-2008 year, which is good news for the overall sector, given ongoing concerns about demand," a local dealer said. Alcatel-Lucent gained an additional boost from Juniper Networks, maker of network products and services, which overnight published a 73 pct jump in fourth-quarter earnings.

"Juniper Network shares surged in the US overnight after their Q4 earnings cane out ahead of estimates," a local dealer said, pointing to a positive read-across for Alcatel-Lucent which also provides telecoms network equipment. Alcatel-Lucent stock rose 0.14 eur or 3.35 pct to 4.32.

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German shares close flat, after rebound from losses earlier this week

The DAX closed down 4.33 points or 0.06 pct at 6,816.74 after trading between 6,782.41 and 7,002.19 The MDAX jumped 159.63 points or 1.88 pct to 8,644.94, while the TecDAX was up 16.79 points or 2.19 pct at 784.04. DAX futures lost 14.50 points or 0.21 pct to 6,874.00, while bund futures gained 0.30 points or 0.26 pct to 116.25. The euro was trading at 1.4694 usd, compared with 1.4703 in London afternoon trade.

Financials led large caps lower, with Commerzbank dropping 0.87 eur or 4.27 pct to 19.49, reversing gains earlier today, while Munich Re fell 3.32 eur or 2.87 pct at 112.42. Lufthansa lost 0.46 eur or 2.76 pct to 16.22 eur after Morgan Stanley cuts its target to 10.40 eur from 22.00 and maintained its 'underweight' rating.

Bayer decreased 1.28 eur or 2.34 pct to 53.53, after rival drug maker Boehringer Ingelheim announced its anti-blood-clotting pill Pradaxa is on track to receive European approval for a first indication.

Pradaxa is set to compete with Bayer's Xarelto pill.
TUI retreated 0.32 eur or 2.21 pct to 14.19.

At the other end of the DAX, Hypo Real Estate rose 1.49 eur or 8.05 pct to 19.99, Traders pointed to a favourable sentiment for financial stocks as Citigroup raised its stance on European banks to 'neutral' from 'underweight'. Volkswagen increased 4.81 eur or 3.14 pct to 157.90 eur, also supported by robust key full-year figures posted by its major shareholder Porsche.

Deutsche Post added 0.58 eur or 2.71 pct to 22.01 eur on speculation the company may overhaul or possibly even sell its unprofitable US express business.

Financial Times Deutschland today cited unnamed sources as saying Deutsche Post wants to sell the company's loss-making US parcel and express business. Chief financial officer John Allan, in an interview with Handelsblatt, said the company has no plans to divest the businesses.

Fresenius Medical Care jumped 0.85 eur or 2.51 pct to 34.65, while Metro gained 1.24 eur or 2.30 pct to 55.24. Over on the MDAX, Tognum shed 0.68 eur or 4.02 pct to 16.25, being the worst decliner on the mid-cap index.

IKB surged 1.13 eur or 19.86 to 6.82, as traders said potential takeover candidates begin building up holdings and pointed to rumours Postbank is interested in acquiring IKB after all. "Chief executive Wolfgang Klein said in December that Postbank is not interested in IKB and this has not changed," a spokesman said, apparently dismissing the rumour.

TecDAX-listed Wirecard lost 0.17 eur or 1.77 pct to 9.42, while AT & S was up 0.90 eur or 7.71 pct at 12.58.

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Milan shares close broadly flat; gainers led by Seat PG, A2A 

The Mibtel index was up 0.39 pct to 25,898 and the S&P/Mib down 0.12 pct to 34,197. Volume traded was an estimated 5.204 bln eur. Seat PG was up 5.62 pct to 0.233 eur. The stock has fallen in recent months after private equity funds dropped a sale of their majority stake.

In the utility sector, A2A rose 6.31 pct to 2.6525. Enel gained 1.72 pct to 7.395. Dresdner Kleinwort reiterated its 'buy' rating on Enel with an unchanged 9.10 eur target ahead of next week's results.

Acea was up 5.85 pct to 12.39. Cazenove started coverage with an 'outperform' and a 15.3 eur fair value for the stock. Saipem rose 4.06 pct to 24.08 and Eni up 0.50 pct to 21.96. One broker said he sees only limited further falls in the oil price.

Fiat was up 2.20 pct to 15.12 on continued positive reaction to yesterday's fourth quarter earnings and 2008 outlook. Finmeccanica rose 3.26 pct to 19.30.

Atlantia added 4.76 pct to 22.02. Brokers said the fall of the Romano Prodi government and possible replacement by a centre-right coalition can favour Atlantia and construction companies. Atlantia has faced regulatory queries under Prodi, while a new centre-right government led by Silvio Berlusconi could boost infrastructure.

Italcementi rose 0.46 pct to 14.16. Impregilo lost 3.64 pct to 3.6625. There have been delays on resolving litigation over Naples refuse contracts. Telecom Italia rose 4.03 pct to 2.016. A listing of its fixed access network unit is seen less likely if Prodi's resignation is confirmed.

Fastweb rose 3.02 pct to 21.18. Deutsche Bank raised its rating to 'buy', from 'hold'. Mediaset also gained, up 1.78 pct to 6.005, on political factors and likely dropping of TV sector reforms. All the same, some brokers say Mediaset has fundamental problems from weak advertising sales.

Mondadori, like Mediaset owned by Berlusconi, lost 2.08 pct to 4.905. Some banks were lower on speculation a minority shareholder is selling his stakes, also accelerating late in the session. BMPS fell 1.95 pct to 3.1475. Banco Popolare was off 3.21 pct to 13.07 and Ubi Banca was off 2.10 pct to 16.35. Unicredit fell 2.35 pct to 4.98.

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