ADVFN Evening Euro Markets Bulletin - October 19th 2010

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London Market Reports
Shares fell in the afternoon after a surprise hike in rates in China took investors by surprise and the leading share index finished firmly in the red.

The People’s Bank of China upped its one-year deposit rate to 2.5% from 2.25%, while the lending rate has been hiked to 5.56% from 5.31%, with effect from Wednesday.

It is the first change the authorities in China have made to interest rate policy since 2007.

Resource stocks, already having a bad day, were sent further into decline by the news. Xstrata, Vedanta, Fresnillo, Kazakhmys and Randgold are the big fallers in the sector.

Anglo American is less affected than most after it confirmed a new greenfield discovery at its West Wall copper project in central Chile. It is the first mineral resource estimate published by Anglo American for West Wall, a 50:50 venture with Xstrata Copper sited 100km northeast of Santiago.

Elsewhere in the mining sector Eurasian Natural Resources Corporation (ENRC) has bought Brazil’s Mineração Minas Bahia (MIBA) and 51% of Mineração Peixe Bravo (MPB) for up to $304m (£192m) in cash.

Falls among the miners has put chip designer ARM’s retreat in the shade. The Cambridge-based company’s intellectual property is used in a number of Apple products and the share price today has been dented by some notes of caution in Apple’s third quarter trading update yesterday evening.

Elsewhere in the tech sector Autonomy, the specialist in what it terms “meaning based computing” has pulled out of its recent slump after well received third quarter figures.

Autonomy’s chief Mike Lynch said growth prospects for the data search software giant remain good. Third quarter profits in the three months to September rose to $57.6m from $48.6m as sales climbed 10% to a record $211m. Underlying operating profits rose by 34% to $86.3m.

First half underlying pre-tax profits from Premier Inn and Costa Coffee owner Whitbread were in line with market expectations but the company had a pleasant surprise on the dividend front.

Group underlying profit before tax rose by 28.4% to £151.8m in the six months to 2 September from £118.2m in the corresponding period of last year. The interim dividend, which most brokers had expected to be moved up to 10p or a little above has been hiked to 11.25p.

A cloud over sportswear retailer Sports Direct International has been lifted as the company indicated that no charges will be brought against it by the Serious Fraud Office. The shares are lower though.

Meanwhile, Blacks Leisure, which was once linked with a bid from Sports Direct, soared after saying it is in talks with several potential bidders for the outdoor clothing and equipment retailer.

Automotive and aerospace engineer GKN expects a “solid” end to the year after sales in the third quarter jumped 21% and trading profit almost doubled. “The outlook for GKN's markets in the fourth quarter remains positive with group sales expected to be at a similar level to the third quarter,” the group said Tuesday.

Housebuilder Bellway bounced back into profit and upped its final dividend as the housing market stabilised though the shares dived, taking several sector peers down with them, after it said "buyer confidence slowly ebbed away during the summer" and sales have picked up only slightly recently.

Real estate investment trust Land Securities has formed a joint venture with the Canary Wharf Group to develop the so-called “walkie-talkie” property in Fenchurch Street, London. The existing property, currently a cleared site with some ancillary retail neighbouring holdings, has been sold by Land Securities to the 50/50 partnership at a price of £90.2m, in line with the March 2010 valuation.

Aerospace and lorry hydraulics group Senior has upped its profits expectations again and now expects to hit the top end of market forecasts this year.


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FTSE 100 - Risers
Diageo (DGE) 1,163.00p +2.47%
Whitbread (WTB) 1,728.00p +2.07%
Standard Chartered (STAN) 1,959.00p +1.98%
Autonomy Corporation (AU.) 1,444.00p +1.76%
Prudential (PRU) 634.00p +1.68%
Royal Bank of Scotland Group (RBS) 46.95p +1.38%
National Grid (NG.) 579.50p +1.31%
Severn Trent (SVT) 1,350.00p +1.28%
Essar Energy (ESSR) 500.00p +1.21%
United Utilities Group (UU.) 590.50p +1.03%

FTSE 100 - Fallers
Fresnillo (FRES) 1,223.00p -5.27%
Xstrata (XTA) 1,248.50p -4.37%
Man Group (EMG) 259.80p -3.74%
Vedanta Resources (VED) 2,174.00p -3.51%
Antofagasta (ANTO) 1,244.00p -3.42%
Rio Tinto (RIO) 3,948.00p -3.24%
Randgold Resources Ltd. (RRS) 6,225.00p -3.04%
Kazakhmys (KAZ) 1,318.00p -3.02%
ARM Holdings (ARM) 388.70p -2.61%
African Barrick Gold (ABG) 556.50p -2.37%

FTSE 250 - Risers
Jupiter Fund Management (JUP) 285.00p +9.62%
Elementis (ELM) 114.00p +7.34%
Lamprell (LAM) 384.00p +5.81%
Mothercare (MTC) 523.50p +5.33%
Kenmare Resources (KMR) 19.35p +5.33%
Avis Europe (AVE) 210.00p +4.17%
Ocado Group (OCDO) 135.70p +3.27%
Savills (SVS) 320.00p +3.23%
Premier Foods (PFD) 16.87p +2.99%
Cranswick (CWK) 893.50p +2.94%

FTSE 250 - Fallers
Xchanging (XCH) 129.60p -6.43%
Bellway (BWY) 565.00p -6.07%
Babcock International Group (BAB) 564.00p -4.81%
Daejan Holdings (DJAN) 2,558.00p -4.59%
Persimmon (PSN) 370.00p -4.19%
Petropavlovsk (POG) 996.50p -3.81%
Redrow (RDW) 116.00p -3.73%
Supergroup (SGP) 1,073.00p -3.51%
Taylor Wimpey (TW.) 25.20p -3.49%
Soco International (SIA) 333.60p -3.33%


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European Market Reports
European markets were hit by China raising its benchmark interest rate.

The People’s Bank of China upped its one-year deposit rate to 2.5% from 2.25%, while the lending rate has been hiked to 5.56% from 5.31%, with effect from Wednesday.

The DAX fell 28 at 6,488 in Germany and the CAC 40 is down 29 at 3,805 in France. The Swiss Market is on the up, however, with the market index 11 points firmer at 6,482 while Spain’s IBEX 35 fell 2 points 10,895.

Volkswagen may delay its merger with Porsche until US legal issues and German tax are resolved, VW chief executive Martin Winterkorn said.

“The legal proceedings may drag on for some time to come until a final decision is reached. For that reason, the planned merger could possibly be delayed,” Winterkorn said in a speech today. “We’re still facing a tax-related hurdle and several legal obstacles.”

The news sent Porsche’s shares into reverse.

Banking shares were wanted after the Basel Committee on Banking Supervision said that the requirement for banks to hold a stock of liquid assets will be subject to an overview period during which regulators will be able to assess the impact on banks’ balance sheets and look out for any unintended consequences. Deutsche Bank and Commerzbank in Frankfurt, Societe Generale, Credit Agricole and BNP Paribas in Paris, UBS and Credit Suisse in Zurich and Santander in Madrid all made progress.

Investor Warren Buffett’s investment vehicle, the reinsurer Berkshire Hathaway, has increased its stake in German reinsurance giant Munich Re above 10% and is in the mood to buy more.

Tech shares took a tumble after slightly disappointing results from consumer electronics giant Apple in the US yesterday. German chipmaker Infineon was also hit by newspaper reports that it may have to restate its deferred taxes on its balance sheet for the last two financial years.

German investor confidence fell to its lowest level in 21 months in October. Economist expected the ZEW index to fall to minus 7 from minus 4.3 in September but even that assessment proved a bit optimistic, as the index retreated to minus 7.2.


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US Market Reports
Global markets were knocked back after being caught out by a surprise increase in Chinese interest rates and the US market was no exception.

The Chinese central bank said it would raise both its benchmark one year deposit and lending rates by a quarter percentage point as it seeks to curb inflation. It is the first change the authorities in China have made to interest rate policy since 2007.

The S&P 500 is down 10 at 1,173, the Dow Jones is 111 lower at 10,032 and the NASDAQ Composite is down 24 at 2,070.

Goldman Sachs bucks the trend after saying third quarter traffic fell by 40%, still exceeding analysts’ estimates.

Earlier in the day, fellow bank Bank of America blamed a $7.3bn loss on new rules limiting fees and credit cards.

In other sectors, Coca Cola’s 8.4% increase in third quarter profits to $2.06bn was driven by strong drinks volumes in emerging markets such as Asia and Africa.

Tech stocks are getting a bit of a battering. Stonking fourth quarter results from the California consumer technology giant Apple last night had the edge taken off by its comments about the next three months. The iPhone maker forecast earnings of about $4.80 a share in the current quarter, below current estimates. Revenue this quarter will be about $23bn.

Fourth quarter sales hit $20.3bn as sales of iPhones and iPads soared. Profits rose by 70% to $4.3bn with earnings of $4.64, well above forecasts of $4.10. Margins dropped to 36.9% from 41.8% a year earlier, however, raising concerns that Apple is feeling the heat from technology companies riding in its slipstream.

IBM is another stock on the slide after declaring figures yesterday. IBM's net income for the third quarter rose 12% to $3.59bn, or $2.82 a share, from $3.21bn, or $2.40, a year earlier. Sales climbed 3% to $24.3bn. IBM boosted its full-year profit forecast to rise to at least $11.40 a share, the third time this year it's raised its estimates.

Software giant Microsoft, meanwhile, is friendless after news broke that Ray Ozzie, the man recruited to be the company’s visionary after founder Bill Gates took a back seat, is to leave the company as a five year stint as its chief software architect.

In economic news, housing starts rose to an annual rate of 610,000 in September, up 0.3% from 608,000 in September.

S&P 500 - Risers
Massey Energy Co. (MEE) $38.48 +8.21%
Parker-Hannifin Corp. (PH) $76.70 +5.91%
Capital One Financial Corp. (COF) $39.13 +5.09%
Zions Bancorporation (ZION) $22.00 +3.04%
PulteGroup Inc. (PHM) $8.43 +2.68%

S&P 500 - Fallers
Supervalu Inc. (SVU) $11.00 -11.29%
JDS Uniphase Corp. (JDSU) $11.44 -5.69%
Illinois Tool Works Inc. (ITW) $46.63 -5.17%
Cliffs Natural Resources Inc. (CLF) $63.21 -4.47%
Newmont Mining Corp. (NEM) $60.04 -3.92%
Abercrombie & Fitch Co. (ANF) $43.92 -3.68%
Interpublic Group of Companies Inc. (IPG) $10.26 -3.39%
Titanium Metals Corp. (TIE) $19.44 -3.19%
Apache Corp. (APA) $103.14 -3.02%
Ford Motor Co. (F) $13.46 -3.01%

Dow Jones I.A - Risers
American Express Co. (AXP) $40.05 +1.26%
Home Depot Inc. (HD) $30.63 +0.33%

Dow Jones I.A - Fallers
International Business Machines Corp. (IBM) $138.99 -2.69%
Microsoft Corp. (MSFT) $25.14 -2.63%
Alcoa Inc. (AA) $12.87 -2.05%
Chevron Corp. (CVX) $82.90 -1.87%

Nasdaq 100 - Risers
Illumina Inc. (ILMN) $50.35 +1.72%
Mattel Inc. (MAT) $22.77 +0.98%

Nasdaq 100 - Fallers
Millicom International Cellular S.A. (MICC) $92.80 -3.60%
Infosys Technologies Ltd. (INFY) $66.59 -3.12%
Joy Global Inc. (JOYG) $70.04 -3.01%
Research in Motion Ltd. (RIMM) $47.13 -2.90%
Urban Outfitters Inc. (URBN) $30.35 -2.66%
Microsoft Corp. (MSFT) $25.14 -2.63%


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Broker tips: Autonomy, Blacks Leisure, ILX
Data search software specialist Autonomy’s third quarter revenues were towards the top end of the company’s guidance range at $211m, up 10% from a year earlier.

Shares in the group rallied Monday on speculation that an acquisition is imminent but there was no sign Tuesday of disappointment at the absence of any news of a purchase, as the shares shot higher on the better than expected third quarter figures.

Autonomy is a developer of software for the retrieval, processing and management of unstructured data such as e-mail, text, audio and video.

Shares have fallen by a quarter since it trimmed its sales forecasts earlier this month, due to fears that the company may have gone ex-growth and can no longer justify a premium valuation rating.

Despite this, the management tone for the outlook was relatively upbeat in Tuesday's statement. “The company reiterated the view from two weeks ago that it has not seen a softening of demand and some of the deals which slipped out of Q3 have now closed, but things had gotten more volatile,” broker Bank of America Merrill Lynch said.

The broker said that movements in working capital and capitalisation of research and development seem relatively benign this quarter, although these have previously “been hotspots for Autonomy results”.

Merrill Lynch has confirmed its ‘buy’ recommendation with a target of 2,000p. “Our fair value of 2,000p is achieved with organic revenue growth assumptions of 14% compound annual growth rate for the next three years (starting in 2010) and ongoing margin expansion due to the strong operating leverage inherent in the company's business model”, the broker said.

The broker has warned of a slowdown in the economy and consequently information technology spending as a “risk to [its] investment case and price objective”.

Echoing comments by Merrill Lynch, the broker Killik also highlighted the “disappointment across the market that the release was not accompanied by the announcement of an acquisition”.

“While today’s statement was more positive in tone, there remains plenty of ammunition for the bears to throw at the stock. Although the guidance for 2011 - to continue to deliver good earnings per share growth, with upside to current market consensus - is positive, we don’t expect the market to make changes to forecasts at this stage given the recent hiccup.”

Although Killik remains positive on the long-term outlook for the business, it has given Autonomy a ‘neutral’ rating with a much lower target of 1,480p.

FinnCap has upgraded Blacks Leisure from ‘sell’ to ‘hold’ as the Milletts retail group confirmed that it is in talks with multiple parties that could lead to a sale of the company or parts thereof.

Though there is no guarantee that any bid will be forthcoming analyst David Stoddart said that with multiple parties rumoured to be involved it will trigger hopes of an auction.

“The outdoor goods sector is ripe for consolidation,” Stoddart said. “The likes of Cotswold, Lion Capital and Go Outdoors are private equity owned so a consolidating deal cannot be ruled out.”

The shares shot up by 25% on the announcement of the bid talks, but the broker cautions that further upside from here may be limited. “Blacks’ recent results do not provide the strongest negotiating base”, said Stoddart.

The broker said that concerns over the company’s possible failure or need to raise additional capital “will be replaced by hopes of a premium for control and synergy benefits”.

FinnCap has retained its target of 35p.

The closure of its financial classroom training business is not likely to cause ILX to break its stride, as its continued growth has been through its international development.

FinnCap, the company’s house broker, has highlighted strong expansion in the software-based e-learning business, particularly as international revenue has increased by 50% according to Tuesday’s trading update.

The group is expected to benefit from the recently announced £0.42m contract win in the Middle East, along with a new office opened in Copenhagen to service the Nordic region. Analyst Mark Paddon has revealed that discussions are also underway to open an office in South Africa.

“Management now believes that international revenue will continue to grow rapidly and form the larger share of group revenue within four-five years,” said Paddon.

CTG, the group’s financial training business, has experienced difficulties in trading over the last financial year as revenues in the division fell to £3.3m from around £5m previously. However, there have been minimal cash costs associated with the closure, which is expected to be complete by the end of this calendar year.

“The effect of the closure is neutral on our adjusted profit before tax and earnings per share forecasts, which remain unchanged following the announcement.”

The house broker’s target stands at 44p.