Evening Euro Market Bulletin - 26 August 09

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Footsie runs out of steam

Wall Street’s inability to hold onto new home sale-inspired gains was the final nail in the coffin for London, bringing to an end a six-day winning streak.
Much of the blame lay with the UK-listed miners who hogged the list of largest losers on weaker metal prices.
Antofagasta was among the worst hit after posting a sharp slide in pre-tax profits. For the six months to June 30, profit slumped to $476.6m from $1.66bn a year ago as revenues slid to $1.18bn from $2.4bn.
Peers Fresnillo, Xstrata and Rio Tinto joined the retreat.
It was much the same picture for oils, with pre-tax profits plunging at Tullow in the first half of the year as the firm felt the pinch of the slide in crude prices. Profit dived to £34.8m in the six months to June 30, down 83% from the £126m reported in 2008. Revenues skidded 23% lower to £291.3m.
Cairn Energy also struggled after disappointing results Tuesday, while oilfield services group Petrofac was another out of favour after declaring figures earlier this week.
WPP staggered lower after saying half-year results continued to reflect the impact of the global economic contraction, which intensified in the second quarter, though results for July did indicate a 'less-worse' picture. Pre-tax profit for the six months fell 47% to £179.3m, partly due to the impact of higher sterling translation of interest costs on Euro-denominated debt.
On a brighter note, outsourcing specialist Serco topped the risers after it said its strong performance in the first half and the good start to the second period supports its expectation in achieving its financial guidance for 2009 and beyond. Pre-tax profit for the half-year increased 32.8% to £93.4m on revenue that rose to £1,950 from £1,491m. The strong results allowed the firm to hike dividends by 25% to 1.85p per share.


Royal Bank of Scotland was wanted in the wake of Tuesday’s cost-saving measures relating to its pension scheme.
In the mid-cap index Punch Taverns is up for the second day in a row after Shore Capital reinitiated the pub group as a ‘buy’ after yesterday’s trading update. Fellow pub landlord Enterprise Inns is also higher, as is pubs owner and brewer Marston’s.
Lovell, the affordable housing division of construction and regeneration specialist Morgan Sindall, has been chosen as a contractor for a £20m redevelopment programme in Hampshire.
Meanwhile, support services and construction company Carillion has won three new contracts worth £121m. The company has been chosen by real estate investment trust Segro for a £50m project in Farnborough that will involve the construction of four office buildings in Farnborough.
Oil services group John Wood saw profits slide in the half-year as the tough market conditions hit exploration and production (E&P) spending worldwide. The group said the recent higher oil prices are likely to have little impact on E&P spending in the second half.
Oil and gas firm Melrose Resources saw first half revenue and profit tumble as a result of lower oil prices and the planned cessation of production from its Galata field.
Sector peer Premier Oil has plugged and abandoned the Frida Marine-1 well in the Congo Marine XI permit.
Ireland’s largest bookmaker Paddy Power reported a decline in half year pre-tax profit but saw 20% growth in online customers.
In vitro diagnostics firm Axis-Shield saw profits almost double in the first half and said business remains strong. Underlying pre-tax profit rose to £3.6m in the six month ended 30 June compared with £1.6m last time. Statutory pre-tax profit increased to £7.5m from £1.6m.

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US Market
Stocks Turn Higher After Seeing Early Weakness
Following an early pullback, stocks have recovered and are posting modest gains in mid-morning trading on Wednesday, helped by the day’s encouraging new home sales data. The major averages are all in positive territory by small margins, looking to build on yesterday’s gains.
Trader sentiment was bolstered by data on new home sales, which increased by much more than expected in the month of July, according to a report released by the Commerce Department.
The report showed that new home sales surged up by 9.6 percent to an annual rate of 433,000 in July from the revised June rate of 395,000. Economists had been expecting sales to edge up to 390,000 from the 384,000 originally reported for the previous month.
Earlier, traders digested a report from the Commerce Department showing a much bigger than expected increase in durable goods orders in the month of July, with the growth largely due to a substantial rebound in orders for transportation equipment.
The report showed that new orders for durable goods jumped 4.9 percent in July following a revised 1.3 percent decrease in June. Economists had expected orders to increase by 3.2 percent compared to the 2.2 percent decrease that had been reported for the previous month.
Excluding an 18.4 percent increase in orders for transportation equipment, durable goods orders increased by a much more modest 0.8 percent in July compared to a 2.5 percent increase in June. The increase came in below economist estimates of 1.0 percent growth.
On the earnings front today, Myriad Genetics Inc. (MYGN) reported fourth quarter earnings of $0.24 per share after the bell Tuesday, beating the consensus estimate of $0.22 per share, although revenues failed to meet expectations.
Brown Shoe Company (BWS) reported a quarterly net loss that came in line with estimates, while Charming Shoppes (CHRS) edged out earnings forecasts. Both firms' revenues failed to meet Wall Street expectations.
In recent trading, the major averages have pulled back off their highs for the session, although they currently remain n positive territory. The Dow is currently up 29.47 at 9,568.76, the Nasdaq is up 6.21 at 2,030.44 and the S&P 500 is up 2.43 at 1,030.43.
Sector News
Despite the volatility seen in morning trading, biotechnology stocks are turning in some of the day’s strongest performances, with the NYSE Arca Biotechnology Index surging up by 5.2 percent, extending its gains and setting a fresh historic intraday high.
Human Genome Sciences (HGSI) continues to help lead the sector higher, benefiting from rumors that it will be taken over by GlaxoSmithKline (GSK). Human Genome Sciences has shot up by 15.5 percent, rising to its best intraday level in seven and a half years.
The housing sector is also on the rise following the day’s upbeat data, with the Philadelphia Housing Sector Index up by 2.4 percent on the day. The index is adding to its recent gains and has climbed to a fresh intraday high, its best in nearly eleven months.
The upward move in the index is being led by shares of homebuilder Hovnanian (HOV), which have jumped by 9.2 percent. The advance has also propelled the stock to a nearly eleven-month intraday high.
While networking, computer hardware, and airline stocks are also on the rise, some weakness remains visible among resource stocks.
Gold and steel stocks are falling by notable margins, with the NYSE Arca Gold Bugs Index and the NYSE Arca Steel Index sliding by 1.3 percent and 0.9 percent, respectively. The dip by resource stocks comes amid a retreat in commodities prices.

European Market
Energy majors weigh
Europe’s leading exchanged closed in the red on Wednesday as weak commodities offset strong banking shares. News that German business confidence rose for the fifth month in a row in August also failed to inspire investors.
The Ifo business climate index rose to 90.5, beating analysts expectations, from an upwardly revised 87.4 in July. Energy shares were lower in line with falling US crude oil futures. Royal Dutch Shell, Eni and Total were among the fallers.
Across the markets, the German DAX closed down 35 points at 5,522 with the French CAC falling 12 points to 3,668. The Swiss market dropped 24 points to 6,177.
On the positive side, many banks, including Commerzbank, UBS and Societe Generale, were still going well. Dutch financial-services group ING was up on reports that it has picked at least six bidders for its private banking operations.
Alcatel-Lucent was leading the risers in France on bid rumours and after upped its rating on the telecoms-equipment giant. French investment bank Natixis rallied after receiving a €35bn guarantee from its parent bank BPCE.
Dutch brewer Heineken reported better-than-expected first-half profits as cost cuts partly offset lower volumes. Net income increased by 20% in the six month ended 30 June to €489m, while beer sales excluding acquisitions fell 6.6%. Suez Environnement saw first-half profits drop 13% to €175m, but the decline was not as steep as feared.
CAC 40 - Risers
Suez Environnement Company (SEV) € 14.53 +11.51%
Alcatel-Lucent (ALU) € 2.74 +11.16%
Veolia Environnement (VIE) € 24.74 +2.93%
LVMH (MC) € 68.19 +2.93%
Dexia (DEXB) € 6.65 +2.28%
Pernod Ricard (RI) € 55.19 +1.98%
Accor (AC) € 35.00 +1.73%
Credit Agricole (ACA) € 12.63 +1.69%
Societe Generale (GLE) € 55.11 +1.10%
Danone (BN) € 38.01 +0.96%
CAC 40 - Fallers
Saint Gobain (SGO) € 32.00 -4.85%
Schneider Electric (SU) € 65.10 -3.61%
ArcelorMittal SA (MT) € 25.23 -3.09%
Bouygues (EN) € 33.30 -2.93%
Renault (RNO) € 32.83 -2.84%
Vallourec (VK) € 107.90 -2.04%
BNP Paribas (BNP) € 57.51 -1.94%
Vinci (DG) € 37.54 -1.70%
GDF Suez (GSZ) € 29.25 -1.68%
EADS (EAD) € 14.52 -1.63%

Broker tips:
M&S, electrical retailers, Serco
Singer Capital Markets has lifted its target for food and clothing retailer Marks & Spencer while maintaining its ‘hold’ rating.
‘Although heavily indebted and exposed to a large pension scheme where actuarial liabilities are likely rising, the investment case for M&S has stabilised as self-help and strategic action combine with a moderation in the decline in consumer spending,’ the broker argues.
Singer is marginally above consensus with its earnings forecast for the year to March 2011, with its numbers based on a 2.4% increase in like-for-like in non-food sales, an improvement which the broker does not regard as a ‘slam dunk’.
‘The main risk, as with other general retailers, is that trading might weaken again next year, in part due to strong seasonal comparatives. This could potentially reverse part of the upgrade cycle seen thus far in 2009,’ Singer said.
Singer’s price target has been lifted by almost one-fifth to 320p, in part to reflect the higher prevailing sector valuations.
Japanese broker Nomura Securities has been looking at the UK electrical retail sector ahead of the entrance, in partnership with Carphone Warehouse, of US player, Best Buy, and tips DSG International as the best stock to be holding.
Nomura notes that 50% to 60% of DSG's Currys and PC World stores will be refitted by Christmas 2010 as it seeks to reposition the business as a service-led electrical specialist. This ongoing transformation has not been reflected in the company’s share price in Nomura’s view, and the broker has reiterated its ‘buy’ recommendation and 35p price target.
‘KESA may need a more differentiated approach: Despite being early to the service-led model, the UK offering is not sufficiently differentiated, making KESA more vulnerable if Best Buy fulfils its potential, in our view,’ Nomura’s Christopher Walker said.
Carphone Warehouse, meanwhile, offers ‘investors a free option on a successful retail launch’ by Best Buy, in Nomura’s view. The broker rates the stock a ‘buy’ and has a price target of 230p.
Support services group Serco surprised the market with better than expected results on Wednesday morning, prompting Charles Stanley to reiterate its recommendation to stock up on the shares.
‘The announcement should be well received for a number of reasons. Firstly, the group has surprised with a much stronger free cash flow [FCF] number than expected (FCF was +54%). Secondly, the earnings quality has improved with no 'one-off' items. Thirdly, Serco has delivered good EPS [earnings per share] growth (+37.7%) and the outlook statement is very positive,’ the broker said.
Charles Stanley notes that the shares have underperformed over the last six months as investors have focused on recovery plays, but reckons the shares are about to enjoy their spell in the sun. The broker foresees appetite for risk declining over the coming months as the rate of economic recovery fails to keep pace with rebounding equity markets. Under such a scenario, the market should turn to defensive stocks such as Serco, Charles Stanley believes.
Charles Stanley has increased its price target from 460p to 480p and reitered its 'accumulate' recommendation.