UK/Euro Financial Market Daily Morning Briefing 02-02-2006

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London

London shares turn lower in early deals as Shell drags down oil sector

Leading shares turned lower in early deals as a disappointing trading update from Shell offset confirmation of a bid approach for Hilton's betting operations, dealers said.

At 9.03 am, the FTSE 100 was 4.0 points easier at 5,797.6, off an opening high of 5,811.8, in contrast to the positive wider market sentiment.

Meanwhile, Wall Street ended yesterday higher as investors cheered strong results and an increased profit outlook from Boeing, with a steep decline in energy prices adding to the momentum.

The upbeat tone that set in late in the day helped the Nasdaq overcome losses tied to Google's weaker-than-expected earnings and end on a positive note.

The Dow Jones Industrial Average rose as much as 100 points, before closing up 89 points at 10,953, the Nasdaq finished up 4 at 2,310 and the S&P 500 also found its legs late in the day, ending up 2 points at 1,282.

Turning to Asia, Japan's Nikkei 225 ended 230.46 points to the good at 16,710.55, a fresh five year high, while the Hang Seng was 0.81 firmer at 15,743.11 by midday.

Still in Asia, oil prices edged higher overnight, as the International Atomic Energy Agency (IAEA) prepared to meet on Iran's nuclear activities.

The UN's nuclear watchdog is to decide whether to bring Iran to the UN Security Council for possible sanctions over the Islamic republic's move to resume sensitive nuclear work.

Earlier this morning, New York's main contract, light sweet crude for March delivery, rose 37 cents to 66.93 usd a barrel.

Back in London, the latest earnings from Shell helped to drag oil majors lower after fourth quarter and full year results missed expectations.

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The group, in its first final results as a unified company, reported adjusted net income of 5.361 bln stg - 2 pct below consensus forecasts of 5.475 bln, Merrill Lynch said.

The broker said reserve replacement in 2005 was also a disappointing 70-80 pct, and indications that E&P volumes would be broadly flat in 2006 would leave investors let down.

Furthermore, plans for a 2006 share repurchase program of 5 bln usd is short of a consensus that was looking for at least 10 bln or even a special dividend, Merrill added.

Shell fell 34 pence to 1971, the top blue chip faller, followed by peers BP, off 6-1/2 at 669 and BG, down 6 at 630-1/2.

Still on the downside, Smith & Nephew fell 8-1/2 at 539-1/2 after the medical devices group was downgraded to 'neutral' from 'overweight' at JP Morgan on valuation grounds.

The US broker noted that the stock has rallied strongly from its lows of four months ago as fears over deterioration in the fundamentals of the US orthopoedics industry have subsided.

Despite this, JP Morgan said it remains slightly concerned about Smith & Nephew's 2006 margin guidance.

In further news, the group announced that finance director Peter Hooley will retire in mid-2006, to be replaced by Adrian Hennah, currently chief financial officer of Invensys.

And broker comment also hit Lloyds TSB as analysts advised caution following yesterday's speculative gains.

Shares opened 3 pence lower at 532 after shooting 25-1/2 pence higher yesterday amid frenzied bid speculation, with US financial giant Wells Fargo and Spain's BBVA touted as potential suitors.

Dresdner downgraded the shares to 'reduce' from 'hold' on valuation grounds, saying if anyone is waiting for the Americans/BBVA to put Lloyds out of its misery, they may be disappointed.

Exane BNP was also cautious, lowering its stance to 'neutral' from 'outperform', as it argued the stock has been driven higher by bid rumours ever since October and feels that most of them lack credibility.

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In pharmas, AstraZeneca was off 18 at 2716 amid caution ahead of full year results later this morning.

In contrast, Hilton was a star performer, 12-1/2 pence to the good at 379, after the hotel and leisure group confirmed a press report it has rejected further approaches for its betting arm Ladbrokes.

In a statement, the group said the approaches included a number of pre-conditions and "failed to recognise the long term strategic value of Ladbrokes".

In response, Merrill Lynch said private equity groups CVC Capital, KKR, Blackstone and BC Partners have all been mooted as possible suitors.

As it reiterated its 'neutral' advice, the broker said it believes a leveraged buy-out of Ladbrokes is possible and should not be ruled out given the significant private equity interest in the betting and gaming sector at present.

The news lifted mid-cap peer William Hill 18 pence higher at 596-1/2 and Rank 6 to the good at 274.

Miners were also in demand after Rio Tinto reported record full year earnings, boosted by high commodity prices and launched a new 4 bln usd capital management programme.

JP Morgan though reiterated its 'neutral' recommendation and said earnings were slightly below its expectations, mainly on the back of higher production costs.

Sentiment in the sector was further boosted by a rise in commodity prices with copper hitting fresh highs over night.

Rio gained 37 at 2954, Xstrata took on 26 at 1653, and Kazakhmys added 8-1/2 at 878.

Elsewhere, Wolseley gained 52 at 1420 after UBS and Morgan Stanley both lifted their price targets on the stock to 1,700 pence and 1,490 respectively.

The brokers were upbeat on the group's earnings potential going forward as UBS stuck to its 'buy' advice and Morgan Stanley stayed 'overweight'.

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On the second-line, GCap Media gained 3 at 252 on news it has increased its share of London's commercial radio audience over the final quarter of last year, narrowing the gap on the capital's market leader, Chrysalis Group PLC's Heart FM.

On the downside, 888 was hit by profit taking after the on-line gaming group posted a sharp rise in fourth-quarter revenues, buoyed by strong growth in the number of punters playing poker, and said it had made a strong start to the current year.

Shares were down 9 at 206.

Diary of Events

For a diary of key UK financial events this week, click here

US Summary

For a summary of US stocks at the close of trade, please click here

Amsterdam

AMSTERDAM - Market data at 09.15 GMT

Major indices:

• AEX index 455.11, down 0.59 points
• AMX Midcap index 569.80, up 0.41 points
• Government bonds narrowly mixed

Losses at Royal Dutch Shell, down 1.85 pct to 27.61, pushed the AEX index into the red. The oil giant posted fourth-quarter results slightly short of consensus forecasts, with analysts expressing disappointment over the group's buyback programme

KPN lost 0.77 pct to 7.77

Ahold gave up 0.15 pct to 6.63

Financials were largely lower, with Aegon slipping 0.22 pct to 13.40, Fortis shedding 0.14 pct to 29.11 and ING off 0.2 pct at 29.69 Major gainers:

Vedior soared 8.25 pct to 14.43 after reporting better-than-expected results for the fourth quarter. Fellow staffing companies were also higher, with USG People advancing 3.07 pct to 44.38 and Randstad rising 1.89 pct to 43.66

ASML was up 1.76 pct at 19.05

Reed Elsevier added 1.46 pct to 11.82

Unilever extended yesterday's gains amid takeover speculation, firming 1.02 pct to 59.55

Frankfurt

FRANKFURT - Market data at 09.23 GMT

Major indices:

• DAX 30 - 5,728.59, up 2.06 points or 0.04 pct
• MDAX - 8,180.87 up 16.39 points or 0.20 pct
• TecDAX - 705.30, up 14.70 points or 2.13 pct
• DAX future - 5,747.50, up 7.50 points or 0.13 pct

Major gainers:

Continental AG, up 1.09 eur or 1.35 pct at 82.09

BMW, up 0.36 eur or 0.96 pct at 37.86, following the release of strong US sales figures for January

DaimlerChrysler, up 0.35 eur or 0.73 pct at 48.42, on the back of its US sales results for January

ThyssenKrupp, up 0.15 eur or 0.72 pct at 20.90

MAN, up 0.31 eur or 0.65 pct at 48.31

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Major losers:

Henkel, down 2.70 eur or 2.94 pct at 89.10, after reporting largely in-line full-year 2005 results as investors locked in profits after the stock's solid run in the last few months, and as some investors were disappointed the figures were not as good as Henkel's solid third quarter results

Deutsche Boerse, down 1.62 eur or 1.54 pct at 103.34

Deutsche Bank, down 1.02 eur or 1.14 pct at 88.67, after reporting "mixed to slightly-better-than-expected" fourth quarter results, as investors locked in profits after the stock's recent solid run

Lufthansa, down 0.07 eur or 0.53 pct at 13.15

Commerzbank, down 0.15 eur or 0.52 pct at 28.85

Paris

PARIS - Market data at 09.23 GMT

Major indices:

• CAC-40 down 13.43 points at 4,985.96
• SBF-80 down 8.48 at 5,559.56
• SBF-120 down 9.47 at 3,606.28

• Volume: 1.1 bln eur
• 17 CAC-40 stocks up
• 21 CAC-40 stocks down
• 4 unchanged

Major gainers:

Nexans, up 3.73 eur or 8.1 pct at 49.64 after the cables group posted an 86 pct jump in full year net profit to 117 mln eur, while forecasting further earnings growth for 2006.

Alcatel, up 0.34 or 3 pct at 11.55 after posting fourth quarter earnings well ahead of forecasts, while announcing a 2005 dividend payout of 0.16 eur per share, the first payout since 2001, and ahead of a consensus estimate for 0.12 eur.

Eurotunnel, up 0.05 or 11.9 pct at 0.47 after announcing a preliminary deal on its efforts to restructure a 9 bln eur debt load.

Major losers:

Thomson, down 2.06 or 12.3 pct at 14.77 after posting a larger than expected slowdown in fourth quarter sales growth, due to weakness of DVD and set-top decoder sales. The company also said the EBIT margin for its core businesses will fall to 8.5 pct in 2006 from the 9 pct expected for 2005.

Business Objects, down 1.65 or 4.8 pct at 33.07 after reporting a near doubling of full year net profits t0 93 mln eur, but the IT services company gave lower first quarter earnings guidance than expected by most analysts.

Altran Technologies, down 0.39 or 3.3 pct at 11.28 after the company reported 2005 sales of 1.434 bln eur, slightly below analyst forecasts, but dealers said the stock was being hit by profit taking after a strong run of gains - the stock is still up over 18 pct since the beginning of this year.

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