HSBC worries drag FTSE lower

Benchmark New York crude contract stood at around $67.86 a barrel by the close of London markets, slipping back from a session high of $69.20.

Full coverage of US markets can be found here.

Vodafone was the centre of attention ahead of tomorrow’s quarterly performance figures, with shares adding 3p to 121p on volume about twice the average. Worries about disappointment at the firm’s core European markets have led Vodafone shares to derate from about 132p over the past fortnight.

There was a bit of short covering today after rival operator O2 said it had added 1.75 million customers in the Christmas quarter, beating forecasts thanks to a good performance in Britain. O2’s £17.7 billion takeover by Spain’s Telefonica, agreed last year, was today declared unconditional.

Still, brokers did not expect Vodafone to have matched O2 over the festive season as price competition and regulatory change dent its revenues in Germany, Italy and the UK. “The bar has been raised,” said Citigroup. “Vodafone could do well to beat O2’s subscriber numbers.”

For more on O2’s results, click here.

Shares also benefitted from speculation that Vodafone may consider selling its American business. The Sunday Times cited “several” of Vodafone’s largest shareholders as wanting to see the group’s 45 per cent stake in Verizon Wireless disposed, and the cash returned via dividends and buybacks.

US research house Sandford Bernstein argued: “a sale of Verizon Wireless would make sense for ... shareholders, but needs Vodafone management to shift its mentality toward shrinking the company. This would be a significant shift in strategy, though, and is unlikely to happen overnight.”

The Sunday Times article speculated that Verizon could pay Vodafone £25 billion for the stake. However, it failed to mention that about 20 per cent of the total proceeds would probably be taken by tax -- a charge analysts considered would make any deal far less compelling.

“A disposal would have limited impact on Vodafone’s multiples but would reduce future earnings growth and leave the group with greater exposure to the more difficult Western European mobile markets,” concluded Cazenove.

Sandford Bernstein thought the European concerns would remain paramount, leading it to value Vodafone as an ex-growth stock worth 110p apiece.

Read the Sunday Times story here.

PartyGaming will also be posting quarterly performance figures this week. Shares in the online poker specialist closed down 2.75p to 140p amid some flowback from a placing; Morgan Stanley offloaded a line of 20 million at 140p each last session for one of its institutional clients.

PartyGaming shares have rallied from 117p since since early last month, when a trading statement revealed sales had been lifted by a software upgrade. While PartyGaming’s next statement (due Friday) is expected to be just as upbeat, dealers were concerned that the company may not have much to say beyond what was already contained in the December release.

For a full diary of this week’s events, click here.

Elsewhere on the downside, HSBC fell 12p to 931p after a weak earnings report last week fron Citigroup, the world’s biggest bank, led Goldman Sachs to downgrade its stance on HSBC to “in-line” from “outperform”. The broker was worried about the read-through from continued loan pricing and underlying growth pressures at Citigroup’s US credit card and consumer finance business.

HSBC took an estimated 32 per cent of last year’s profits from North America and Mexico. These “sizable North Americas operations are likely to be a burden, not boost, to the group’s overall earnings prospects and sentiment,” Goldman told clients.

Track HSBC shares here.

There was no corporate news significant enough to support the British market, although trading statements were generally reassuring.

Wolseley, the world’s biggest plumbers’ merchant, said that group sales grew by a quarter over the last five months of 2005, fuelled by acquisitions. The firm said it was well positioned for further growth as its US business (the largest division) had made a strong start to the year. Business in Europe remained slow.

Wolseley’s statement added that profit margins were weaker year-on-year due to higher raw-material prices, as well as investment and acquisition costs. Shares inched up 7p to £13.37.

Deutsche Bank argued that the good news on trading is already in the share price, whereas risks to growth are not. The stock stands at more than 14 times current-year earnings on Deutsche’s forecasts, compared with a sector average 12.4 times.

Wolseley “remains exposed to downturns in the US market and, as shown today, the European business is generally unexciting,” Deutsche told clients in an e-mail repeating “sell” advice. “Prices are also coming off and this is having a negative impact on margins. The stock is more exposed than peers to dollar weakness - forecast by our economists for the year ahead - and we believe that the French business is still underperforming.”

Track Wolseley shares here.

House builder Barratt Developments said it has seen improved buyer confidence in the past three months, with sales rates encouraging. Still, shares eased 7.5p to 947.5p.

Barratt said that it had forward sales of about £700 million for its year to end June. That, along with completions, accounted for about three-quarters of its full-year objective.

Panmure Gordon analysts said the detail of trading update looked mixed and the outlook was generally positive. But, with shares up 60 per cent last year, they reckoned the gains are all done and downgraded to “hold” from “buy”.

Read Barratt’s statement here.

Centrica was among the top blue-chip markets, adding 1.75p to 265p after a Sunday newspaper picked up on last week’s stories that the energy supplier is the most likely target for Gazprom.

Alexander Medvedev, deputy chairman of Gazprom, said in a newspaper interview last week that the Russian group wants to take 20 per cent of the UK gas market by 2015, and that acquisition was the best way to build this position. Centrica has more than half the retail gas market via its ownership of British Gas.

For detailed information about Centrica, click here.

Hopes of M&A also underpinned Schroders, up 40.5p to £10.65. Fund management stocks has been lifted in recent days after the UK arm of Gartmore was put up for sale by its US parent, leading traders to look again at how to value the sector.

F&C Asset Management was top performer on the FTSE 250 index, up 12.75p to 215.5p, while Aberdeen Asset Management was ahead 6.75p to 159.75p. Morgan Stanley started coverage of the latter firm with an “overweight” rating and 185p share-price target.

For detailed information on Aberdeen Asset Management, click here.

British Airways took on 3.25p to 315.25p as dealers noticed a busy market in out-of-the-money call options for the airline’s stock. Spikes in demand for such contracts -- which provide the holder the right to buy shares at a fixed price over a specific time period -- are sometimes hoped to indicate potential M&A action to come.

The actual reason for the pickup in demand appeared to be more prosaic. HSBC was recommending clients pick up March calls on BA shares at 330p, which cost around 9.5p apiece. The broker recommended the options as a cheap and low-risk way to gain exposure ahead of BA’s third-quarter results, due February 3.

HSBC calculated that, over the last five quarters, BA’s shares have on average risen 13 per cent in the weeks surrounding its results. If all goes to form, that means the call options would have a potential return of about 170 per cent compared with the 13 per cent available on the primary market, against a maximum downside risk of just 9.5p each, the broker argued.

For detailed information on British Airways, click here.

Among the mid-caps, Skyepharma took on 1.5p to 45.5p after Ian Gowrie-Smith, its chairman, resigned “in the interest of all shareholders”. The drugs developer has been trying to head off a shareholder rebellion, and late last year appointed advisors after attracting bid interest.

Read more about Skyepharma here.

SCI Entertainment took on 13p to 502p. The new owner of the Lara Croft games franchise revealed first-half sales were about £40 million and said it remained in bid talks. Management’s previous guidance had been for sales of £15 million.

“As a relatively small player in the industry, with a strong games release schedule and the potential for further Eidos related cost savings to come through, there looks to be scope for competing bids to drive the price higher,” argued analysts at Insinger.

For detailed information about SCI, click here.

Vedanta Resources slid 69p to 970p after the India-based miner launched a $850 million convertible bond issue to pay for development costs and a refinancing of debt at its subsidiaries. The converted stock will have no voting rights, meaning the Agarwal family will not dilute their 53-per cent stake in the firm.

Track Vedanta shares here.

Finally, small-cap punters’ favourite Trafficmaster rose 3.5p to 40p after it said trading improved significantly in the second half. Cost savings meant annual profits will be in line with expectations even after sales fell short, the sat-nav company said.

Bridgewell Securities, Trafficmaster’s house broker, raised its rating on thew stock to “overweight” from “neutral” in reaction. “With lingering uncertainties over 2005 now resolved, we believe the leaner and more focused company looks set for a good recovery in 2006,” it said.

Elsewhere on broker watch:

Citigroup raised Rank to “buy” from “sell”. It cited takeover hopes.

AB Foods went to “hold” from “buy” at ABN Amro.

Panmure Gordon raised Greene King to “buy” from “hold”.

Dresdner Kleinwort raised Antofagasta to “buy” from “add” and lifted Lonmin to “buy” from “hold”. The house also cut Barratt Developments to “sell” from “reduce”.

Cobham moved to “buy” from “neutral” at UBS.

And Signet was cut to “underperform” from “in-line” at Goldman Sachs.

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