UK/Euro Financial Market Daily Morning Briefing 13-01-2012

Market Movers

• techMARK 1,933.98 +0.57%
• FTSE 100 5,701.12 +0.68%
• FTSE 250 10,498.83 +0.31%

Banks were leading the way on Friday with Royal Bank of Scotland (RBS) topping the charts, lifting the Footsie above the 5,700 level. Hopes that the sovereign debt crisis in Europe is easing lifted the mood on the markets, with investors looking ahead to a key Italian debt auction later today. Just five stocks on London's blue chip index were in the red early on. However, Invensys plummeted on the FTSE 250 after a profit warning.

The Italian and Spanish debt auctions provided a bit of a spark on Thursday after both nations saw solid demand and a fall in yields. However, with Fitch's head of sovereign ratings David Riley saying yesterday that there is a "material risk" of a downgrade to Italy's credit rating by the end of January, eyes are now on the country's debt sale today, in which the nation is planning to sell bonds due in 2014 and 2018.

Yesterday was a busy day on the economic front with both the Bank of England and the European Central Bank (ECB) keeping hold of interest rates. ECB President Mario Draghi announced that the decision to maintain rates was unanimous, suggesting that there were some signs of stabilisation in the single-currency area.

BANKS RISE, INVENSYS PLUMMETS AFTER PROFIT WARNING

RBS rose strongly, extending gains from yesterday after it revealed a massive shake-up to its investment banking and wholesale businesses, including a mass employment reduction of 3,500. Sector peers Barclays and Lloyds were also in demand.

The big news on the corporate front today was on the FTSE 250 with engineering and software group Invensys issuing a profit warning. The company said that a number of operational issues relating to certain projects within Invensys Operations Management and Invensys Rail will put a dent in operating profits. Shares dropped 19%.

Leading the mid-cap index was instrumentation and controls company Spectris which notched up record sales and operating profit in 2011, helped by useful contributions from recent acquisitions.

Balfour Beatty and WS Atkins rose after securing contracts with Network Rail.

A drilling update from Caspian Sea-focused oil and gas giant Dragon Oil has revealed the "great potential" of the Dzheitune field on the Cheleken Contract Area, offshore Turkmenistan, the firm said.

Fashion brand Ted Baker said it had a very good Christmas trading period despite, as usual, not embarking on any significant promotional activity. Shares rose 5%.

Non-woven industrial materials group Fiberweb dropped after its 2011 profit and loss account swung into the red and revenues slumped.

Education software firm Tribal Group has unveiled a strong performance in the final quarter of the year, saying adjusted pre-tax profit for 2011 will be 'significantly' ahead of the board's previous expectations.

Hot Tuna, the troubled surf wear retailer, tumbled after announcing that it is selling itself to Brand Holdings for £950,000.

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UK Event Calendar

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-All eyes on Italian debt auction later this morning. Italian 10 year bond yields dropping to 6.47% (-16bp).

-Banks deposited €489.9bn at the ECB last night.

-EU oil embargo on Iran will probably be delayed by 6 months.

-Credit markets hinting at a technical default on Greek debt, WSJ says.

-Technical problems at the Swiss stock exchange delay opening.

FTSE-100: 0.61%
Dax-30: 0.85%
Cac-40: 0.88%
Ibex 35: 1.16%

Stocks have begun the day with notable gains, ahead of an Italian medium-term debt auction scheduled for later in the day, towards 10am. Investors are also on the look-out for today's results from US financial powerhouse JP Morgan Chase and new economic releases Stateside.

For some, however, the low levels of trading continue to speak volumes about the lack of conviction in markets (no pun intended).

Italy is expected to offer between €2bn and €3bn in BTP Nov14 and another €1bn to €1.75bn in BTP Jul 14 and Aug 18. At the end-of-December auction, Italy issued the BTP Nov14 at 5.62%.

There are mixed reports regarding Greece and the likelihood, or not, of an agreement on 'private sector involvement'. The head of the Institute for International Finance (IIF) has been cited as saying that Greek authorities and private creditors are far from an agreement, but Societe Generale's chief executive seems to have affirmed the opposite to journalists at Les Echos.

On the corporate front meantime, lay-offs, asset sales and pay freezes are the flavour of the day (again).

Swiss pharmaceutical giant Novartis will slash almost 2,000 jobs in the United States due to the loss of patent protection on its top-selling drug Diovan.

Spanish toll road operator Abertis is to sell a 16% stake, worth around €1bn euros that it holds in satellite operator Eutelsat. Eutelsat shares are falling 5% at the start of trading.

Air France-KLM has announced a pay freeze for staff in its home market as part of a 3 year plan.

MACROECONOMY

Spanish December CPI data has come in at 2.4% on the year, as expected.

At 10am Eurostat will release its latest EMU trade data.

OTHER MARKETS

Front month Brent futures are now moving up by 0.64% to the $111.96/barrel on the ICE.

The Euro/dollar is now bouncing further, and up 0.38% at 1.2863 dollars. Unicredit recommends keeping an eye on 1.2940, the level needs to be regained fast or the rebound may prove short-lived.

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Dow Jones 30: +22 at 12,471
S&P 500: +3 at 1,296
NASDAQ Composite: +14 at 2,725

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On a black day for the UK High Street today, which saw Tesco issue a profit warning that sent its shares plummeting, fears grew that battened-down household spending could already be tipping the UK economy into recession. (…) Shares in Tesco plunged 15%, dragging down with it supermarket rivals Morrisons, J Sainsbury and Marks & Spencer. The dismal outlook was compounded by grim sales figures today from fellow retailers Argos, Homebase, Thorntons and Mothercare. (…) Today's bleak retail news comes alongside weak manufacturing and industrial production figures: official data showed industrial output posted a surprise 0.6% fall in November, raising the prospect the overall economy contracted in the final quarter of 2011. 'There isn't very much that's performing well in the UK economy,' said Philip Shaw of Investec. 'With services seemingly having got off to a very poor start in Q4 (2011), today's data heightens the risk that the UK economy contracted in the final quarter of the year. 'We've been suggesting that the UK will be in recession at the start of this year, but it may have started even earlier,' The Daily Mail reports.

Australia is expected to surpass Qatar as the world's top exporter of liquefied natural gas (LNG) by 2017 after Japan's Inpex Corp committed to a US$34bn export project in Australia's Northern Territory. Inpex, Japan's top oil and gas explorer, and its joint venture partner, Total SA, the French energy company, gave the green light to the project earlier this morning, setting in motion the construction of one of the world's biggest LNG facilities. The project will see natural gas from the Ichthys gas field piped around 800km (497 miles) from the Timor Sea, off the coast of Western Australia, to the coastal city of Darwin in the Northern Territory, The Times reports.

British Gas has become the latest big energy supplier to cut bills, but the millions of households that buy its gas will miss out. Britain's largest supplier yesterday reduced its electricity tariff for 5.3m customers by 5%, or £24 a year, with immediate effect. This equates to a total bill of £439 a year on average. It refused to pass on the recent fall in the wholesale cost of gas, though, which means that gas bills for 9.2m customers remain unchanged. The second-largest supplier, SSE, also joined the price war yesterday. It reduced gas bills for 3.5m customers by 4.5%, or £28, to £742 a year on average from March 26. Electricity prices for its 5.1m customers are being held, The Times says.

NIESR estimated that the UK's gross domestic product grew by 0.1% in the last three months of the year, compared with the third quarter. Despite the gloomy figures, Chancellor George Osborne insisted there were "signs" the economy was turning a corner. He identified the prospect of falling inflation, low interest rates and plans to deal with the record budget deficit as reasons for cautious optimism. "Borrowing is coming down. The job is being done as we talk. Jobs are being created in the private sector," Mr Osborne said in an interview tonight. "One thing you will see this year is a fall in prices, in the rate of inflation," he added, according to The Telegraph.

Delta Air Lines and private equity giant TPG Capital are reportedly considering separate bids for bankrupt American Airlines parent company AMR. Delta is said to have hired Blackstone Group – which helped with Delta's bankruptcy process in 2005 – to help it assess a potential bid, while TPG is expected to look for a strategic partner for any deal. AMR filed for Chapter 11 bankruptcy protection last November and is currently restructuring its debt and cutting annual costs, which it estimates are about $800m (£521m) higher than its domestic competitors. The company's problems present an opportunity for further airline consolidation. Since 2008, three large mergers have reduced competition in the industry, making it easier for carriers to raise prices, The Telegraph reports.

"Beyond the glitz of the Detroit Auto show, and the money poured into the stands, the luxury battle is one that matters for Ford and GM. It's understandable that both companies are tired of being considered the uncool cousin in their own backyard. They've both recognised that American drivers' sense of style and luxury has moved on from an era in which a car's sheer size denoted status. As one industry analyst put it bluntly, the drivers who subscribed to that notion are either dead or should no longer be on the roads. More importantly, though, this is a part of the market that Ford and GM can't afford to be unsuccessful in. It's true that US car sales jumped by just over 10% last year, and most forecasters expect growth of between 5% and 7% this year. But with the US economy showing signs of improvement, the roughly $70bn luxury market in the US will grow faster still, at about 14%, according to RL Polk, an industry research firm," The Telegraph writes.

India's retail sector is expected to swell to $785bn by 2015, making the country irresistible to foreign groups such as Tesco, Wal-Mart and Carrefour of France. Nevertheless, the market is proving a tough nut to crack. (…) Tesco has spent years lobbying for a relaxation of rules banning overseas ownership of supermarkets, but this proved fruitless last month when a U-turn by the Indian Government left foreign multi-brand retailers locked out of the market — forced to watch from the side-lines as "consultants" to domestic operators. (…) Until India's politicians can agree on reforms, Tesco's grand ambitions will remain a tantalising possibility, says The Times.

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