UK/Euro Financial Market Daily Morning Briefing 05-07-2012

London open: Markets cautious ahead central bank decisions

Market Movers

• techMARK 2,047.74 -0.05%
• FTSE 100 5,684.50 0.00%
• FTSE 250 11,141.87 -0.17%

- BoE expected to increase QE
- ECB predicted to slash rates
- GKN rockets after Volvo Aero acquisition

The FTSE 100 was flat in early trading on Thursday with markets cautious ahead of policy decisions in both the UK and Europe due after midday.

The Bank of England's (BoE's) Monetary Policy Committee (MPC) is predicted to keep the Bank Rate at 0.5% but ramp up its asset purchase programme by £50bn to £375bn. "Financial markets have become increasingly convinced that another slug of QE is on its way, and the MPC has done nothing to dissuade investors from this view," according to analysts at Barclays Capital.

Meanwhile, the European Central Bank (ECB) is widely expected to cut the refinancing rate from the current level of 1.0%. Gerhard Schwarz, head of Equity Strategy at Baader Bank, said: "The most likely outcome in our view is a 25 basis point cut. A bigger cut would increase pressure on the ECB to move towards 'unconventional' stimulus – something the ECB has been very reluctant to do recently. So with the refi rate standing at 0.75% the ECB could still argue to have some firepower left."

FTSE 100: GKN surges early on

Global engineering firm GKN jumped over 12% after saying it had agreed to buy Volvo's aero engine division and would turn to institutional investors to raise money to help pay for it. Arden Partners upgraded its rating on the stock this morning to 'buy'.

GKN plans to pay AB Volvo around £633m for Volvo Aero, which designs, engineers and manufactures components for aircraft engine turbines. To help fund the deal GKN aims to place £140m of new shares with institutional investors, with the rest of the money coming from new debt facilities.

Shareholders of Xstrata were clearly pleased with the group's decision to adjourn its extraordinary general meeting until a later date, with the stock rising early on. Shareholders were due to vote on the the Xstrata-Glencore merger on July 4th.

Utilitiy giant Centrica fell after Goldman Sachs downgraded the stock to 'neutral' and cut its target from 441p to 422p.

Banks were out of favour early on with Royal Bank of Scotland, Lloyds and Standard Chartered among the worst performers. Barclays edged higher this morning following the sharp falls seen over the past week. Over the last seven days, the stock has dropped over 14% on the back of the LIBOR scandal.

FTSE 250: Dunlem sees strong Q4 sales

Homewares retailer Dunelm advanced after saying that total revenue increased 21.2% in the fourth quarter of the group's fiscal year, boosted by the unusually wet weather. However, the group cautioned that it expects consumer spending to remain under pressure.

Ahead of its annual general meeting today, Great Portland Estates has revealed its net asset value per share and portfolio valuation are on the up, causing shares to rise.

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Thursday July 05

QUARTERLY PAYMENT DATE
GlaxoSmithKline

INTERNATIONAL ECONOMIC ANNOUNCEMENTS
Bloomberg Consumer Confidence (US) (14:45)
Continuing Claims (US) (13:30)
Crude Oil Inventories (US) (15:30)
ECB Interest Rate (EU) (12:45)
Initial Jobless Claims (US) (13:30)
ISM Non-Manufacturing (US) (15:00)
ISM Services (US) (15:00)
MBA Mortgage Applications (US) (12:00)
PMI Construction (GER) (08:55)

GMS
Content Media Corporation, Moneysupermarket.com Group

FINALS
Begbies Traynor Group, NCC Group

AGMS
Babcock International Group, Boussard & Gavaudan Holding Ltd. GBP Shares, Great Portland Estates, Vianet Group

UK ECONOMIC ANNOUNCEMENTS
BoE Interest Rate Decision (12:00)
New Car Registrations (09:30)

FINAL DIVIDEND PAYMENT DATE
Cineworld Group, Quarto Group Inc., Scisys

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Europe open: Spanish and Irish debt auctions on tap

-Banks deposit €791bn overnight at ECB.
-Spain to auction up to €3bn in medium-term debt
-Ireland to return to sovereign debt markets

FTSE-100: 0.03%
Dax-30: 0.14%
Cac-40: -0.25%
Stoxx 600: -0.09%
FTSE-Mibtel: -0.89%
Ibex 35: -0.70%

European equities have begun the session in a mixed fashion, with periphery benchmarks under water but British and German indices slightly higher.

The above ahead of key meetings, later today, of the rate setting organs of the European Central Bank (ECB) and the Bank of England. Perhaps critically, investors will be watching for any guidance from the ECB regarding the possibility of additional so-called non-standard measures.

A small barrage of macroeconomic data is scheduled for release this afternoon Stateside. As well, investors are awaiting tomorrow´s non-farm payrolls reports; with some observers believing that it could affect expectations for a third round of quantitative easing from the Federal Reserve.

Volkswagen has reached an agreement with German tax authorities to carry out the purchase of the remainder of Porsche which it does not already own, for €4.46bn.

French Prime Minister Jean-Marc Ayrault said on Wednesday that gas prices in France will not rise more than the rate of inflation and that the government is preparing a plan to make gas and electricity more affordable for consumers, Reuters reports.

From a sector stand-point, and within the DJ Stoxx 600, the best performance can now be seen in shares of: automobiles (2.1%), food (0.35%) and healthcare (0.30%).

Economic data on tap

Oil and euro in holding pattern

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Markets Closed due to US Independance Day

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Thursday newspaper round-up: Barclays, ECB, QE

City regulators raised concerns with Barclays's board in February about a breakdown of trust with the bank over incidents including a £7.5bn Cayman Islands scheme known as Protium to transfer toxic assets off its balance sheet. Andrew Tyrie, the chairman of the Treasury Select Committee, yesterday questioned ex-Barclays boss Bob Diamond over the Financial Services Authority's worries about Protium and the boardroom culture more broadly. Referring to the board meeting, Tyrie asked: 'Did they tell you that trust had broken down between the FSA and Barclays and they didn't have confidence in senior management?' Diamond replied: 'No sir,' The Daily Mail reports.

The European Central Bank (ECB) is expected to cut interest rates today in a bid to boost progress made by EU leaders in fighting the crisis at a summit last week. The ECB, which will hold its regular monthly policy meeting at 12.45 (UK time), will trim eurozone borrowing costs by a quarter of a percentage point to a new record low of 0.75%, analysts have predicted. The move is designed to help strengthen the relatively positive sentiment in financial markets since the EU summit in Brussels. "The ECB has the chance to calm financial markets at least for a few months if it complements the summit decisions with a serious effort to stimulate the economy," said Berenberg Bank economist Christian Schulz. "We expect the ECB to cut its main interest rate by 25 basis points to 0.75%," he added, The Telegraph writes.

After a bruising European Union summit, Italy sought yesterday to reassure the German Government — and, above all, the German taxpayer — that it will not need a bailout like Portugal, Ireland or Greece. Mario Monti, the Prime Minister, meeting Angela Merkel near Rome less than a week after his veto threat forced concessions from the German Chancellor, reiterated that Italy was not asking for European rescue funds to support Italian bonds — the key mechanism to which Mrs Merkel agreed in Brussels. Italy, he said, "is not in the same situation as Greece, Ireland and Portugal". Rather, he argued that the bond-buying mechanism would make it more possible for virtuous governments to pursue painful reform. Aware of the backlash in Germany against Mrs Merkel's concessions in Brussels, he said that he and Mrs Merkel shared a commitment to competitiveness and admitted he was very influenced by German economic thought, says The Times.

China has started stockpiling rare earths for strategic reserves, a state-backed newspaper said, in a move which may raise more worries over Beijing's control of the coveted resources. China has already started the purchase - using state funds - and storage of rare earths for strategic reserves, the China Securities Journal said, but did not say exactly when the initiative was launched. The country produces more than 90% of the world's rare earths, which are used in hi-tech equipment ranging from iPods to missiles, and it has set production caps and export quotas on them. Major trading partners last month asked the World Trade Organization (WTO) to form a panel to resolve a dispute over China's export limits on rare earths after earlier consultations through the global trade body failed, The Telegraph explains.

The Bank of England's quantitative easing (QE) policy has eroded pensioners' incomes and left new retirees thousands of pounds worse off, experts warned today. With the Bank's policymakers expected to sanction more money-printing tomorrow, Tom McPhail, head of pensions research at Hargreaves Lansdown stockbrokers, said the UK's pension annuity rates have been in 'meltdown' for the past four years. He said that a man with £100,000 in July 2008 would have been able to secure an income of £7,855 whereas his younger brother, who hits pension age today, would only be able to secure an income of £5,743 – a drop of 27%, The Daily Mail reports.

Approximately 200,000 Britons own second homes in areas such as the Dordogne and other parts of France, particularly those serviced by budget airlines. Now, however, holiday home owners find themselves in the sights of President François Hollande as he seeks to tax the better-off to reduce France's large budget deficit. On Wednesday (July 4th), the French government announced it was to increase taxes on foreign-owned second homes. Tax on rental income would rise from 20% to 35.5%, and capital gains tax on property sales would rise from 19% to 34.5%. The extra in each case is being labelled a "social charge," The Telegraph says.

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