ADVFN Evening Euro Markets Bulletin - October 18th 2010

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London Market Reports
Weak start despite M&A burst

Market Movers
FTSE 100 5,684.83 -0.33%
techMARK 1,767.52 -0.18%
FTSE 250 10,790.08 -0.40%

London has made a cautious start to the day with miners weak though a burst of M&A has lifted the mood elsewhere.

Mining giants BHP Billiton and Rio Tinto have confirmed that their proposed $116bn Pilbara iron ore joint venture is dead in the water.

The companies had agreed in December of last year to establish a production joint venture covering the entirety of both companies' Western Australian iron ore assets, but the hook-up has run into regulatory opposition, prompting the companies to abandon the idea.

Other mines are also in the doldrums following a mixed day's trading on Asia. Lonmin, Antofagasta and Vedanta are now the worst performers, though all in the sector are under pressure.

BP has sold its upstream businesses and associated interests in Venezuela and Vietnam to TNK-BP for a $1.8bn. TNK-BP, Russia's third largest oil firm, is owned equally by BP and the AAR consortium, which is comprised of Alfa Group, Access Industries and Renova.

Specialist insurer and reinsurer Beazley has gone public with its bid approach for underwriter Hardy Underwriting after its private approach was rejected by the Hardy board. Beazley made an indicative cash offer of 300p per share to the Hardy board on 6 October but received a rejection letter on 11 October which the company claims left its board “surprised and disappointed.”

Bluebay Asset has agreed an all cash takeover by Canadian bank Royal Bank of Canada (RBC) that values the fixed income fund manager at just short of £1bn. BlueBay shareholders will receive 485p in cash for each BlueBay Share, valuing the firm at approximately £963m and representing a premium of 29% to Friday's close. Shareholders will also get the dividend of 7.5p proposed at the end of last year, making the total consideration 492.5p.

SABMiller, one of the world’s largest brewers, traded in line with expectations during its first half as slight volume growth, price increases and lower raw material costs offset a mixed performance in key markets.

Loss making Clipper Windpower is to be bought out by its 49.9% shareholder, US engineering giant UTC, in a cash deal that values the wind turbine maker at £139.5m and its shares at 65p.

Gulf Keystone Petroleum has raised £109.24m from a placing to help speed up its drilling programme in Kurdistan. There was no shortage of takers as the fundraising was oversubscribed. Just over 78m shares were bought by existing shareholders for 140p each.

Jordan-based pharmaceuticals firm Hikma has sorted out its dispute with Mutual Pharmaceutical relating to the sale of oral colchicine tablets. Hikma’s subsidiary and US agent, West-Ward Pharmaceutical, has discontinued its sales of oral colchicine until approval of its New Drug Application by the US Food and Drug Administration (FDA).


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UK Event Calendar
The government’s keenly awaited comprehensive spending review is published on Wednesday, with the emphasis expected to be firmly on swingeing cuts in public spending.

The chancellor of the exchequer, George Osborne, has set a target of cutting the structural deficit – the bit that is not subject to cyclical patterns - to zero by fiscal 2015/16.

The expectations are that the government will seek to cut just over three quarters of the budget deficit through spending cuts, with the rest to be raised through increased tax revenues. That contrasts with the previous government’s preference for a two-thirds/one-thirds split, though now that Labour is led by Ed Milliband, the Labour party’s preference now appears to be for a 50/50 split, for fear that excessive spending cuts will derail the economy’s fragile recovery.

On the corporate side, drugs firm GlaxoSmithKline is scheduled to give a third quarter earnings update at noon on Thursday. Nomura Securities thinks net sales will be £6,716m and earnings per share (EPS) 27.2p. Charles Stanley is more optimistic on the sales side, going for £6,820m, but thinks EPS will be 25.6p.

Tuesday sees hotels to coffee shops operator Whitbread announce its second quarter results. At the beginning of September the group said like for like sales growth at the company had accelerated in the 24 weeks to 19 August compared to the second quarter performance, so the market will be looking to see whether the momentum has been maintained.

Charles Stanley thinks profit before tax will rise to £150m from £118m at the halfway stage last year. The broker has pencilled in a figure of 60p for EPS, up from 47.3p last year, and thinks the interim dividend will be nudged above 10p to 10.1p, versus 9.65p last year.

“An update is expected to be provided on Premier Inn’s new room pipeline,” Charles Stanley reckons. “A progress report is also anticipated on fledgling operations in the Dubai and India,” it added.


Monday October 18

INTERIM DIVIDEND PAYMENT DATE
Lamprell, Neptune-Calculus Income & Growth VCT

INTERNATIONAL ECONOMIC ANNOUNCEMENTS
Tertiary Industry Index (JPN)
Department Store Sales (JPN)
Cabinet Office Monthly Economic Report (JPN)
Capacity Utilisation (US) (14:15)
Industrial Production (US) (14:15)

GMS
Eatonfield Group, President Petroleum Co

FINALS
Europa Oil & Gas, Lok'n Store Group, Nanoco Group, Tristel

ANNUAL REPORT
Animalcare Group

IMSS
Senior

EGMS
Zhejiang Expressway Co 'H' Shares

AGMS
Jupiter European Opportunities Trust, MBL Group, NXT, Promethean

TRADING ANNOUNCEMENTS
MHP SA GDR (Reg S), SABMiller

FINAL DIVIDEND PAYMENT DATE
Electric & General Inv Trust, Mattioli Woods, Renishaw


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Currencies Market Reports
Bernanke caution gives markets pause, as US dollar rebounds

For the last six weeks the US dollar has slid lower relentlessly on speculation that the Federal Reserve will embark on a further stimulus program to shore up the flagging US economy. Bernanke’s comments on Friday more or less confirmed the inevitability of such a move, and yet the US dollar index despite making new 8 month lows actually finished the day higher than when it started, which perfectly illustrates the dichotomy that can exist in currency markets between expectation and reality.

The fact is the Fed chairman’s comments about the difficulties in determining the pace, size and costs of any purchases are weighing on the FOMC committee with respect to how aggressive they should be at their November meeting. This has given the markets pause for thought and may give the US dollar some respite. Bernanke’s views on the prospects of the US economy are likely to be further analysed when he gives another speech on Tuesday night.

There is no doubt the US dollar remains firmly under the spotlight but one has to question how much easing is already factored into the price and this could make it susceptible to sharp rebounds.

Friday’s move off trend line support at 76.10 from the all-time lows in March 2008 at 70.70 in the US dollar index has provoked some short covering beyond 77.00, but it would need a break above 78.00 to really get things going.

Also in the spotlight this week will be the pound, when on Wednesday the long awaited UK government spending review will highlight the specific areas of government and the economy likely to be most affected by the UK chancellors spending cuts over the next 5 years. We’ve already had the (CEBR) Centre for Economics and Business Research suggesting that the Bank of England may have to inject another £100bn into the economy as growth starts to contract and the cuts start to bite.

On the other side of this argument MPC hawk Andrew Sentance has suggested that the Bank of England will start to lose credibility if it continues to ignore the threat of the current high levels of inflation. On Tuesday night the governor of the Bank of England Mervyn King is due to speak on the economy and he has an uncanny habit of talking the pound down.

While in Europe ECB President Trichet is also expected to give a speech on the European economy on Tuesday afternoon, so we can expect some significant volatility in currency markets over the next couple of days, but especially on Tuesday as each central bank representative looks to talk their recovery prospects up, and their currencies down.

EURUSD – Friday’s late slide in the single currency and failure to close above 1.4000 suggests we could well see a correction lower after the gains of recent weeks. A new high at 1.4155, just shy of the 1.4195 resistance soon gave way to a sharp sell-off closing below the 1.4000 level and generating a daily dark cloud cover candlestick reversal.
A break below 1.3865 trend line support from the 5th October lows would suggest further euro weakness, and a decline through 1.3800 towards the 1.3500 area.
As I suggested in Friday’s note the single currency needs to consolidate above the 1.4000 level to push on past 1.4195 towards the 1.4370 level which would be the 76.4% Fibonacci retracement of the 1.5145/1.1880 down move.

GBPUSD – another new high on cable on Friday saw the pound hit 1.6105 before dropping sharply back closing below the 1.6000 level and generating a gravestone doji on the daily charts in the process. For the move to 1.6250 to unfold the cable needs to consolidate above 1.6000.

This inability to make inroads above 1.6000 suggests a lack of conviction in the current upside momentum. The break below the 1.5970 level in Asia which has supported the last two days intraday pullbacks would suggest a deeper correction, but still within the broader uptrend from the June lows at 1.4350 where support comes in around 1.5700/10.

EURGBP – despite Friday’s sell off the single currency continues to find support just above the 0.8700 level even though we have closed below the 0.8770 level.
A break and close below last weeks lows would suggest that the top at 0.8838 is in and a move back to the 0.8500 level is on the cards.
The single currency’s break below the medium term trend line support at 0.8740, suggests we could well se this break unfold though we could still see another rally, and a re-test of the 0.8770 area.

USDJPY – Friday’s sharp down move was unable to break below the previous lows at 80.85, and as such we now have two levels of support at this level. These twin lows now become the latest obstacle to a revisit of the 1995 lows of 79.80. The main resistance remains around the 82.20/30 level which is keeping a lid on the dollar for now.


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US Market Reports
US stocks were mixed after Federal Reserve chairman Ben Bernanke’s hints about the imminence of a fresh round of fiscal stimulus hit blue chips, though bid talk lifted the techs.

In a speech Friday Morning, Bernanke said "there would appear...to be a case for further action" as unemployment remains stubbornly high. He also suggests putting inflation concerns to one side.

“It seems likely that inflation trends will remain subdued for some time," he said.

The Dow Jones industrial average closed down 31 at 11,062. The broader based S&P 500 added 2 at 1,176. Nasdaq did best, rising 33 points to 2,468.

Dismal consumer confidence figures were blamed for the fall in the Dow. The Thomson Reuters/University of Michigan index of consumer sentiment fell to 67.9, its lowest level since July, and a full point lower than economists had expected.

US consumer prices rose less than anticipated in September, however, though bears argued that merely demonstrated how weak consumer demand is. The US consumer price index rose 0.1% after advancing 0.3% in August. The size of the gain was half what pundits had predicted.

On the plus side, retail sales were healthier than forecast, rising for the third month in a row. Sales were up 0.6% in September, versus expectations of a 0.4% increase, boosted by strong demand for cars. Excluding car sales, the index was up 0.4%, in line with expectations.

Banks were again a weak spot as the concerns over their foreclosure practices grow with criticism from both state and federal regulators.

Results from General Electric were mixed. Quarterly earnings of 29c a share beat forecasts of 27c, although a bigger than expected drop in revenue disappointed.

There are also losses for toymaker Mattel in pre-market trade after a big revenue shortfall overshadowed better earnings.

Hard disk drive maker Seagate was a hot property after rumours circulated that private equity firms TPG and Kohlberg Kravis & Roberts are sizing the company up for a bid, with a price of $7.55bn rumoured. Fellow computer storage firm Western Digital rose in sympathy.

Search engine giant Google also gave a leg up to the NASDAQ Composite index with a 32% year on year increase in third quarter net income. Underlying earnings per share were $7.64, versus market consensus forecasts of $6.68.

Web portal Yahoo! was in demand on persistent rumours that internet service provider AOL is contemplating a bid, possibly in conjunction with private equity partners.

S&P 500 - Risers
Google Inc. (GOOG) $601.70 +11.23%
Western Digital Corp. (WDC) $31.89 +8.14%
Amazon.Com Inc. (AMZN) $164.64 +5.86%
Computer Sciences Corp. (CSC) $49.39 +5.13%
Monsanto Co. (MON) $56.78 +4.92%

S&P 500 - Fallers
Gannett Co. Inc. (GCI) $12.85 -8.80%
First Horizon National Corp. (FHN) $10.03 -7.90%
Capital One Financial Corp. (COF) $36.86 -7.60%
Mattel Inc. (MAT) $22.45 -6.46%
General Electric Co. (GE) $16.30 -5.01%

Dow Jones I.A - Risers
Hewlett-Packard Co. (HPQ) $42.80 +1.59%
Microsoft Corp. (MSFT) $25.56 +1.31%
Cisco Systems Inc. (CSCO) $23.36 +1.26%
McDonald's Corp. (MCD) $77.48 +0.57%
Pfizer Inc. (PFE) $17.74 +0.45%

Dow Jones I.A - Fallers
General Electric Co. (GE) $16.30 -5.01%
Bank of America Corp. (BAC) $11.98 -4.92%
JP Morgan Chase & Co. (JPM) $37.15 -4.05%
Boeing Co. (BA) $70.11 -1.75%
American Express Co. (AXP) $39.12 -0.81%


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Monday newspaper paper round-up
George Osborne is planning further big cuts in welfare spending this week, as part of an audacious drive to prove that the coalition can match Labour’s pre-election pledge to protect key frontline services.

The chancellor wants to squeeze the welfare budget, releasing cash for spending on those areas that Labour had promised to protect from the cuts: hospitals, schools, overseas aid and the police, the FT reports.

BHP Billiton and Rio Tinto have formally abandoned their Australian iron ore joint venture after being told by regulators in Europe, Australia and Asia that their proposal would not be approved. The decision to walk away from the venture, announced in June last year and estimated by analysts to be worth $116bn, had been widely expected after the proposal to create the world’s top iron ore exporter encountered stiff resistance from the steelmaking industry, the FT reports.

Britain is at risk of a Japanese-style “lost decade” unless banks step up lending and companies increase investment and add to their workforces, a leading economics group has warned. In its latest forecast for the economy, Ernst & Young’s ITEM club said that the UK should avoid a double-dip recession, but it said that the outlook remained uncertain and that its forecast was dependent on companies spending and hiring, the Times reports.

The Asian insurance giant that Prudential failed to snatch in a controversial takeover bid this summer is to go ahead with what will be the world’s second-largest flotation this year. Mark Tucker, the former Pru chief who now runs AIA, said that the $20bn (£12.5bn) float would help to “unleash the potential” of the company and promised to use the listing to become the “pre-eminent life insurance provider in the Asia-Pacific region” in a clear challenge to his former company, the Times reports.

CQS, one of London’s biggest hedge funds, is to announce plans to float a new fund on the UK stock market – the usually low-profile firm’s first public offering. The move is the second hedge fund listing in the space of a week and follows that of the $31bn (£19.4bn) Brevan Howard, Europe’s largest hedge fund, which on Thursday said it was to float a version of its £1bn Credit Catalysts fund, the FT reports.

State workers are prepared to strike in the event of a pay cut and changes to their pensions, a major report revealed. Some 49%of state workers surveyed by the Chartered Institute of Personnel and Development agreed with the statement "workers have to do what's necessary to protect their jobs and if that disrupts public services, that's the price of living in a democratic society", compared with just 27% of those in the business world, the Telegraph reports.

Lord Freud, Minister for Welfare Reform, has accused "unscrupulous" landlords of ripping off the housing benefit system and exploiting low-income families. Private landlords will pocket almost £8.5bn from the taxpayer this year through housing benefit - more than a third of the total £21.5bn bill, according to figures from the Department for Work & Pensions (DWP), the Telegraph reports.

Equitable Life policyholders have been left stunned after it emerged that the Government was poised to offer up to £1.5bn in compensation — less than a third of what they believe they deserve. Emag, the influential campaign group, described the figure, leaked late last week, as a “cynical pre-emptive strike” by the Treasury to undermine the findings of a report by the Public Administration Select Committee and fresh testimony from Ann Abraham, the Parliamentary Ombudsman, the Times reports.

A group of influential hedge fund managers with assets of about $100bn has launched a stinging attack on central banks and regulators for bailing out stricken financial institutions. The critics, which include credit market experts at investment banks, have also warned that injecting cash into weak economies — a process known as quantitative easing — increases the risk of a financial crisis, the Times reports.

Last-minute negotiations between Terra Firma, the private equity owner of EMI, and investment bank Citigroup have failed to avert a courtroom showdown between the two City giants. The £7bn clash of the titans will see Guy Hands of Terra Firma giving evidence against his former advisor and friend, the Citi deal-maker David Wormsley, the Telegraph reports.

Guardian Media Group (GMG) and the private equity investor Apax hope to raise up to £2bn from the sale of the Auto Trader publisher Trader Media Group (TMG), with the two companies eyeing a possible deal within the next 18 months, the Independent reports.

Shares in Betfair, the world's largest online betting exchange, are set to be priced at close to £14 when they debut on the stock market this week – valuing the company at nearly £1.5bn. City sources say there has been huge demand among institutions for the issue, with the initial public offering expected to be oversubscribed when it is launched on Friday, the Independent reports.