UK/Euro Financial Market Daily Morning Briefing 09-08-2007

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Leading shares were lower early on, with market sentiment again hit by US sub-prime concerns as rumours emerge that WestLB is in trouble, and with utility companies falling after International Power reported below expected H1.

At 9.06 am, the FTSE 100 index was down 38.7 at 6,355.2, after closing up 85.1 points at 6,393.9 yesterday, while the FTSE 250 index was down 53.8 at 11,401.

In the US overnight, Wall Street closed sharply higher, as solid results in the technology arena and renewed demand for risky debt soothed investors, a day after the Federal Reserve said the economy should keep expanding.

The DJIA rose 153.56, or 1.14 percent, to 13,657.86.

While the Standard & Poor's 500 index rose 20.78, or 1.41 percent, to 1,497.49. The S&P has had its biggest three-day point gain since October 2002.

The technology-based Nasdaq composite index posted its largest one-day point gains since June 29, 2006.

The Nasdaq added 51.38, or 2.01 percent, to 2,612.98.

Meanwhile, in Asia this morning, Tokyo's Nikkei 225 index closed up 141.32 points or 0.8 pct at 17,170.60 and Hong Kong's Hang Seng was up 204.16 points at 22,740.83 by midday.

In oil news, light, sweet crude for September fell 20 cents to 72.22 usd per barrel in Wednesday morning trading on the New York Mercantile Exchange, even after the Energy Department said crude and gasoline inventories fell last week as refiners reduced output.

Turning to London, International Power lost 19-1/2 at 429-3/4 early on, after reporting below expected H1 results.

Earlier today, the company announced pretax profits before exceptionals of 276 mln stg, against 216 mln stg for the same period in 2006, boosted by acquisitions in North America and higher spreads in Europe.

In reaction, Citigroup said the results were slightly disappointing operationally with the US, Australia and Middle East all coming in below forecasts.

Citigroup added, however, that a particularly low tax charge meant EPS was in line with forecasts, while there was also good news that International Power is to pay an interim dividend of 2.77 pence.

Sector peers also suffered on the back of the news, with British Energy Group 13-3/4 lower at 460-3/4, United Utilities down 17 at 652 and Kelda Group giving away 22 to 804.

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In a note to clients, UBS said following the withdrawal for satraplatin by GPC Biotech, it has decided to completely remove the drug from its valuation on Johnson Matthey.

The broker said it has cut its EPS estimates on the group by about 3 pct in full-year 2008 and 2009 and by 4 pct from 2010, to reflect the previously assumed contribution from satraplatin and the company's first quarter trading statement, which indicated slower growth than expected.

Profit taking hit Standard Life, slipping down 11 to 330 following strong gains yesterday.

Alliance & Leicester suffered a similar fate, losing 23 to 1,084, as investors took profits following the bank's gains yesterday on the back of bid speculation.

Moving onto the upside, BAE Systems was the top riser, up 15-1/4 at 451-1/2 after the aerospace group forecast good growth from its US-led Land & Armaments and UK Programmes in the full year as it reported a 17 pct rise in first-half EBITA to 700 mln stg from 600 mln last time.

BAE's basic EPS came in at 15.3 pence compared to 9.1 pence last time. As such, the firm's interim dividend increased 13.6 pct to 5 pence a share.

In a note reacting to the results, UBS reiterated its 'buy' recommendation, saying the results were ahead of expectations and adding that, given the strength of trading across BAE, it would have to revise its earnings estimates. However, it believes management will again caution about extrapolating H1 numbers into H2. This may limit consensus FY upgrades.

Elsewhere, fund manager Schroders added 42 to 1,328, after it reported a 40 pct rise in first half pretax profits this morning, helped by sharp increases in profits at its asset management and private equity subsidiaries.

Pretax profits for the first six months of the year to end-June rose to 185.6 mln stg, up from 132.3 mln stg in the same period last year.

First half pretax profits at Schroders' asset management arm rose to 123.2 mln stg from 96.8 mln stg, while pretax profits from private equity rose to 36.2 mln stg from 17.7 mln stg.

Funds under management grew to 137.6 bln stg at June 30 from 128.5 bln stg at Dec 31 200.

On the second line, reports of flat sales expectations this morning pushed Spirent Communications lower, down 4 at 66.

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The UK telecoms equipment testing company, reported a 24 pct rise in half-year profits but said it expected flat sales in the second half.

The Crawley-based company -- whose technology is used by telecoms equipment manufacturers and telecoms companies to test fixed-line and broadband networks

-- said pretax profit excluding exceptional items for the six months of the year was 8.1 mln stg from 6.5 mln in the same period a year earlier and ahead of the average analysts' forecast of 7.5 mln.

Elsewhere, media group Emap gave away 15-1/2 to 852 this morning after the sale of parts or all of the group appears to have stalled as a leading private equity group says that market volatility means that financing is unavailable, according to a report in The Times.

In economic news today, the UK deficit in trade in goods is expected to widen to 6.5 bln stg in June from 6.3 bln stg in May.

"The underlying position looks much as it did last month, with stable services surpluses alongside sizeable and volatile goods deficit," said Ross Walker at RBS.

The rise of the pound is likely to be behind a widening in the trade deficit, with this most evident in the non-EU deficit since the pound gained strongly against the US dollar but remained relatively flat against the euro.

The European Central Bank's August monthly bulletin will be watched for further details on the outlook for euro zone interest rates after ECB president Jean-Claude Trichet's brief statements following the interest rate decision a week earlier.

Through his reference to "strong vigilance" on inflation risks, Trichet signalled that the market can expect a further quarter point rate hike to 4.25 per cent in September.

Analysts noted, however, that the remarks -- made in a hastily convened press conference - were relatively brief, without any comment on whether interest rates are still "on the accommodative side" or that financing conditions remain "favourable".

Diary of Events

For a diary of key financial and corporate events in the UK this week, click here

US Summary

For a summmary of US stocks at yesterday's close of trade, click here

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News from BNP Paribas freezing three of its investment funds revived nervousness about US credit markets and sparked a negative sentiment on the AEX, a trader said.

MAJOR INDICES

AEX 526.66, down 4.32 points

AMX Midcap 721.92, down 3.62 points

Government bonds mixed

MAJOR DECLINERS

TomTom dropped 4.08 pct to 42.81 eur

Vedior shed 3.31 pct to 36.40 eur

DSM dropped 2.83 pct to 10.96 eur

KPN lost 2.32 pct to 10.96 eur after news that it has increased its stake in takeover target Getronics

Oce lost 4.26 pct to 15.51 eur

Fugro shed 3.01 pct to 46.13 eur

Wereldhave lost 0.62 pct to 94.72 eur after reporting first-half earnings

Wegener lost 0.06 pct to 17.79 eur after strong first-half results, but analysts were negative about the value of the takeover offer by Mecom

MAJOR GAINERS

Crucell rose 2.14 pct to 16.70 eur

Aegon put on 0.52 pct to 13.64 eur, outperforming on better-than-expected Q2 earnings and a 1 bln eur share buyback

Ahold put on 0.44 pct to 9.12 eur after unit Schuitema reported higher sales in the second quarter

Wolters Kluwer added 1.14 pct to 22.15

Lisbon

PSI-20 index: down 14.20 points at 13,366.70

Major gainers:

Galp, up 0.04 eur to 10.73, after Merrill Lynch raised its full year EPS estimates for the company by 11 pct to 0.69 eur, citing expectations of stronger margins in gas and power, and refining and marketing business based on Galp's forecast-busting second quarter results posted yesterday.

Brisa, up 0.27 or 2.69 pct to 10.29. Yesterday evening the company said it plans to propose to shareholders that its board of directors be enlarged to 13 members from 11 currently and include a Babcock & Brown director, representing the Australian investment firm that has a 10 pct stake in the company.

BCP, up 0.05 at 3.90 outperforming its peers and extending yesterday's heady gains after the bank's announcement yesterday that stakes will be unlocked ahead of the 27 AGM re-run sparked expectations for further stake building by rival factions in the bank's share capital.

Major fallers:

EDP, down 0.05 at 1.20. The company is set to face increased competition after Galp announced yesterday that it plans to enter the wholesale and retail electricity market in early 2008.

Paper related stocks, with Semapa down 0.37 or 2.96 pct at 12.13, Portucel off 0.02 at 2.99 and Altri 0.04 lower at 6.62.

Selected banks, with BES down 0.28 or 1.68 pct at 16.42 and BPI off 0.03 at 6.61, amid rumours that German peer West LB could be in trouble from its exposure to the US subprime mortgage market.

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IBEX-35 index down 44.40 points at 14,961.7

Major gainers:

Cintra, up 0.34 eur or 2.94 pct at 11.90, after it was upgraded to 'buy' from 'neutral' by UBS and on positive newsflow on future concession possibilities.

Abertis, 0.18 ahead at 21.99, also after a UBS upgrade to 'buy' from 'neutral.'

Ferrovial, 1.35 or 2.18 pct higher at 63.15, on expectations of a robust defence against calls to break up its UK airports unit BAA.

Sogecable, 0.36 higher at 29.00, on speculation that Vivendi is considering a bid.

Core shareholder Prisa was up 0.40 or 2.55 pct at 16.09, also buoyed by bid talk involving Mexican business magnate Carlos Slim.

Jazztel, up 0.01 or 2.27 pct to 0.45, boosted by reporting a swing to positive EBITDA in second quarter to June results out late yesterday, and a narrowing of net loss.

Major losers:

Iberia, 0.08 or 2.45 pct lower. Earlier Spanish media reported competition authorities have upheld a fine for price fixing on the airline.

ACS, down 0.71 at 42.99, on reports its Dragados unit did not make the shortlist for the Canadian motorways contract in which Cintra is also bidding.

Repsol YPF, 0.36 lower at 28.31, tracking European oil majors.

Milan

Cement sector leads decline

Main indices

Mibtel at 31,519, down 0.35 pct

S&P/Mib at 30,434, down 0.52 pct

Main S&P/Mib losers

Banco Popolare down 3.07 pct at 18.85 eur

Buzzi Unicem down 3.00 pct at 21.68

Italcementi down 2.29 pct at 18.34

AEM down 1.85 pct at 2.4075

Finmeccanica down 1.81 pct at 20.67

Main S&P/Mib gainers

Fastweb up 1.63 pct at 38.62

Tenaris up 1.47 pct at 18.13

Luxottica up 1.33 pct at 26.72

Mondadori up 1.35 pct at 7.045

Seat PG up 1.22 pct at 0.416

0ther stocks in the news

Saras up 2.17 pct at 4.47 after reporting above-consensus second quarter results, with "all numbers above our expectations", according to one dealer

Tiscali up 2.78 pct at 2.145 after reports of that Management & Capitali, the private equity fund founded by businessman Carlo De Benedetti, may be interested in taking a stake by subscribing to a reserved capital hike

ERG up 0.80 pct at 17.43 ahead of the release of first half results

Indesit down 7.93 pct at 13.33, extending losses that started yesterday

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MDAX - down 211.05 points, or 2.02 pct, at 10,260.82

TecDAX - up 4.84 points, or 0.52 pct, at 917.41

DAX futures - down 69.00 points, or 0.91 pct, at 7,553.00

Major Decliners:

MAN, down 4.21 eur or 4.09 pct at 98.72

Commerzbank, down 1.26 eur or 4.02 pct at 30.06, after Germany's second-largest bank released second-quarter figures which largely beat analysts' expectations, but showed an income mix which traders said was disappointing

Lufthansa, down 0.68 eur or 3.28 pct at 20.05, extending yesterday's losses

Hypo Real Estate, down 1.17 eur or 2.78 pct at 40.93

Fresenius Medical Care, down 0.85 eur or 2.34 pct at 35.53

Major Advancers:

Deutsche Telekom, up 0.15 eur or 1.15 pct at 13.22, after the telecom giant released second-quarter figures, which aside from net profit, beat expectations across the board

SAP, up 0.33 eur or 0.825 pct at 40.34

Deutsche Boerse, up 0.23 eur or 0.27 pct at 84.81

Metro, up 0.21 eur or 0.37 pct at 56.40

Linde, up 0.13 eur or 0.15 pct at 87.61

Other Major Movers:

RWE, down 0.67 eur or 0.84 pct at 79.32, after Germany's second-largest utility released mixed results for the first half of the year, but raised its operating profit guidance and confirmed that it expects the sales of its
American Water unit to take place in 2007.

MDAX-listed Bilfinger Berger, up 0.55 eur or 0.98 pct at 56.64, after it released second-quarter figures this morning showing it had swung to profit for the period, as year-earlier extraordinary expenses were not repeated and sales in the services segment advanced further

TUI, down 0.37 eur or 1.84 pct at 19.76, after the shipping and tourism conglomerate said its operating profit in the second-quarter plunged 95 pct due to investment and restructuring costs. slightly below expectations.

Salzgitter, down 5.61 eur or 3.87 pct at 139.48, as traders said the stock was coming under pressure from profit-taking after the steel company reported solid first-half figures which beat market expectations.

IVG Immobilien, up 0.20 eur or 0.73 pct at 27.70, after Deutsche Bank upgraded the stock to 'buy' from 'hold' following the German real estate group's H1 numbers which were slightly better on an operating level, according to
traders.

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