Britain’s leading shares were weak to profit taking as a spike in oil prices rekindled concern about rising costs. In-line but uninspiring trading updates from the likes of Tesco, Cairn and Pearson failed to provide much of a safety net.
The FTSE 100 index closed down 41.2 at 5699.0, its first break below the 5700 resistance-level in a week. All the wider indices were lower on decent volume of more than 2.8 billion shares. Yesterday’s FTSE 100 close was the best for the measure since June 2001.
New York’s benchmark crude contract was at $65.30 at last look, up $1.38 against its reading late yesterday and trading near its highest in more than three months. Traders said the advance reflected growing unease over Iran’s nuclear program, and the threat to exports from Nigeria after output was cut by a series of attacks on installations.
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As European markets closed, the Dow Jones Industrial Average was down 58 at 10901 in reaction the oil price and nerves ahead key numbers due after the bell from the likes of Yahoo and Intel. Wall Street stock markets were closed yesterday for Martin Luther King Day.
McDonald’s rose after posting global December same-store sales up 5 per cent over last year. But California lender Wells Fargo said that a spike in personal bankruptcies in the quarter weighed on its quarterly earnings, which came in a penny shy of Street estimates.
On this side of the pond, the Bank of England confirmed that consumer price inflation has fallen to match to its annual target rate of 2 per cent. The data, which matched economists’ expectations, triggered sterling to weaken as hopes were bolstered that the next move for UK interest rates will be down -- assuming fuel prices stay under control.
For more on the UK data, click here.
Standard Chartered was among the sharpest blue-chip fallers, having been lifted 6 per cent yesterday in reaction a speculative story about bid interest in one of the Sunday papers. That led traders to close out short positions on the Asia-focused bank that had been taken as part of a pairs trade with peer HSBC.
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Credit Suisse First Boston’s Hong Kong team cut its rating on Standard Chartered to “neutral” from “outperform” this morning. It saw the shares as fully valued, at 12.9 times 2007 earnings, and predicted some chance of disappointment in Korea and Indonesia.
”With one of the best bank ratings in the world, we believe that the company can determine its own strategic future, offering limited cost synergies to serious buyers and risks for investors focused on the take-out that it acquires,” CSFB told clients. The Swiss broker favoured HSBC, which it said offers similar growth opportunities at a lower price.
Standard shares ran back 31p to £13.70. HSBC drifted 9p to 951p,
For detailed information on Standard Chartered, click here.
A downgrade also dragged on Next, with Deutsche Bank removing the stock from its “buy” list. The German broker said the shares, up by a third over the last three months, are now fairly valued. Before revising its valuation, Deutsche wanted to see evidence that the clothes store has resolved its product issues and will deliver better like-for-like sales growth.
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Deutsche’s move was part of a wider note on the UK apparel sector which predicted sales growth of 2 per cent across the industry, a “modest improvement” over last year’s 1.3 per cent expansion.
“While we expect the clothing market to be better in 2006, it still won’t be good,” Deutsche told clients. However, it kept a “buy” rating on Marks & Spencer, arguing that the sector’s No. 1 play will benefit from easy year-on-year comparisons over the next couple of quarters.
Next lost 35p to £16.49. M&S inched up 0.75p to 486p.
Track today’s trading by industry sector here.
Telecoms stocks bore the brunt of late-session selling amid talk that Telecom Italia was set to issue a profit warning. TI shares tumbled 3.2 per cent in Milan even after the company denied the rumour.
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BT Group was top blue-chip faller, down 5.5p to 210.25p and Cable & Wireless slid 2.5p to 120.5p. Vodafone, which has been hit in recent days by talk of a weak quarter at its Italian and German operations, slipped a further 2p to 124p.
Track today’s trading by industry sector here.
In corporate news, Tesco said UK same-store sales excluding petrol rose 5.7 pct in the 7 weeks through Christmas, towards the top end of market expectations.
The Christmas sales growth is the strongest reported out of the big supermarkets, and is an acceleration from its 5.5 per cent figure for the third quarter (Sainsbury was second, showing 5.2 per cent). However, this 0.2 percentage-point improvement compares unfavourably with the rest of the UK retail sector, which saw sales pop by between 1 and 3 per cent over the festive season.
Shares in Tesco drifted 5.75p to 312.25p. Some dealers blamed the move on a mildly disappointing performance for the group’s international unit, where sales growth slowed from 15 per cent in the third quarter to 13 per cent in the fourth.
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“While this is another exceptionally good performance by Tesco, it is no better than expectations and there are unlikely to be any upgrades in the market today,” Citigroup told clients.
Read more about Tesco’s trading here.
Cairn Energy was easier by 3p to £19.70 after a curate’s egg of a trading statement from the oil explorer, which opened up more questions than it provided answers.
Cairn confirmed it will be upgrading reserve estimates for its Mangala and Bhagyam fields -- a well-flagged move that had already been build into market forecasts. But management also indicated a likely reserve downgrade for its Sangu field in Bangladesh, pending a review.
For Cairn’s main Rajasthan development, the company said that the key technical and commercial aspects remain on schedule for first production in late 2007. But cost inflation meant higher development costs at the prospect. Again, specific numbers were not provided.
At the headline level, Cairn’s production estimate for the year passed was a touch ahead of market expectations, at 28,430 barrels of oil equivalent per day, with realisations in a little disappointing at $25 a barrel. (Stock-watchers reckoned that, in sum, the statement had no major nasties but would likely trigger consensus forecasts to edge downwards.)
Read Cairn’s statement here.
Accountancy software maker Sage slipped 3.25p to 253.5p. Microsoft yesterday unveiled a new rebate and free offer for small-business customers as part of a $10 million marketing campaign to break the book-keeping software market, where Sage and US rival Intuit hold strong positions.
Microsoft will be offering a $100 rebate against the $180 sticker price for Microsoft Office Small Business Accounting 2006, as well as providing a year of free technical support to help customers move from its own Excel package or a rival product in the months leading up to tax season.
Sage’s US business, which accounts for about a third of group earnings, is seeing increased competition as big-business vendors such as Oracle and SAP make a play for the entry level, and internet companies including Salesforce.com try to get a following for on-demand applications.
SocGen, repeating a “sell” rating on Sage in a sector review, was concerned that the company is particularly vulnerable at the moment because it is rebranding, which could create a “window of opportunity” for competitors.
For detailed information on Sage, click here.
Publisher Pearson beat the negative trend after saying that trading was in line with expectations, thanks to a strong end of 2005 in its education unit and sustained advertising growth at the Financial Times. Shares took on 16.5p to 687p.
The firm, which also owns Penguin books, said it continues to expect 2006 to be another good year, and that the FT will break even.
Read more about Pearson here.
ICI climbed 4p to 343.25p after Sherwin Williams, its largest competitor for paints in the US, upgraded its fourth-quarter earnings guidance by 20 per cent in reaction to strong sales growth. ICI’s US paints business accounts for approximately 40 per cent of divisional sales.
Sherwin Williams’ announcement follows similarly upbeat news from Rohm & Haas, a competitor to ICI’s National Starch unit. Combined, the paints and starch businesses account for more than two-thirds of ICI’s sales.
For detailed information on ICI, click here.
InterContinental Hotels was another outperformer with the help of SocGen. Shares took on 7p to 836p as the French broker told clients the shares look undervalued.
SocGen expects InterContinental to return around £1 billion once its remaining property assets are sold. It also argued that the group’s move to a managed rather than owned business model will make it more defensive and give it a strong position in the US, the strongest-growing lodging market. That led SocGen to set a target price of £10.
For detailed information on InterContinental. click here.
Back on the high street, Blacks Leisure said both sales and profit margins were “satisfactory” over Christmas and that full-year profits should meet City forecasts. However, the outdoor clothing specialist said it remains cautious about underlying demand, sending shares down 2p to 495p.
A more optimistic message came from John David Group. The sports retailer said full-year earnings should be above current market expectations after a substantial improvement in second-half trading, although its fashion wing was still in the doldrums. Shares, having added as much as 20p at the open, were down 0.5p to 247.5p by the close.
Track John David shares here.
Dana Petroleum was among the mid-cap risers, up 51p to £10.07. Merrill Lynch raised its rating to “buy” from “neutral” and set a price target of £10.75, arguing that the City’s “Mauritania-or-Bust” perception of the group fails to recognise its broader strengths.
Dana’s production and development portfolio is under-appreciated, Merrill argued. It highlighted the firm’s nine-country well exploration campaign and its historic strength in asset trading, a unique characteristic in the UK market.
To drag in the day traders, Merrill’s research note also hinted at possible takeover interest: “Dana continues to be a strong potential take-out candidate, given its strong UK production base, much sought after 24-36 per cent operated stakes in three Mauritanian exploration blocks and 15% per cent stake in the potentially world class Algeria Sbaa gas development project,” it told clients.
For all kinds of everything about Dana, click here.
Peer Tullow Oil ended well off highs but held on to a 1p gain at 303p. That followed on news its Mputa-1 well in the Lake Albert area of Uganda has hit hydrocarbons in two sections, with oil recovered from one.
Tullow has a 50 per cent share in three blocks across the region, with Australia’s Hardman acting as partner and operator.
While the companies did not declare Mputa-1 a commercial discovery, their statement was the first from the block to demonstrate conclusively the presence of oil. (Oil finds are preferable to gas given the infrastructure cost involved in startup prospects.)
Davy Stockbrokers called it a “breakthrough” find, telling clients: “The Mputa-1 well arguably demonstrates that the whole basin has potential. In particular, the larger structures located under Lake Albert ... should be viewed with more confidence.”
However, Davy noted that Tullow is not testing the well, and will only dig again if additional discoveries are made. That suggests a relatively small discovery size for the well, probably less than 100 million barrels, its analysts reckoned.
Track Tullow Oil shares here.
SCI Entertainment added 18p to 536p as dealers flushed out the last of a stock overhang, thought to have been caused by the liquidation of a hedge position taken by a broker to Robert Bonnier. A margin call is thought to have forced the former Scoot boss into cashing out contracts for difference on SCI. The entrepreneur was understood to have held the contracts since before the games publisher revealed in October it had received two tentative bid approaches.
SCI is expected this week to provide a trading update. The company, which last year bought Tomb Raider publisher Eidos, may also provide its first update in three months as to how the takeover talks are going.
For detailed information about SCI, click here.
On broker watch:
Travis Perkins was upgraded to “outperform” from “in-line” at Goldman Sachs.
Bunzl was rated “overweight” in new coverage at Morgan Stanley, with a target price of 720p.
John Laing was raised to “buy” from “hold” at Panmure Gordon.
Bridgewell Securities moved to “neutral” from “overweight” on Wellington Underwriting and cut both Hiscox and Amlin to “underweight” from “neutral”. Catlin went to “overweight” from “buy” as part of the same research.
Mothercare went to “hold” from “buy” at ABN Amro.
SocGen raised InterContinental Hotels to “buy” from “hold” in a note that was mailed out late yesterday.
And UBS cut Close Brothers to “neutral” from “buy”.
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