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EU banks may see balance sheets shrinking – IMF

Newsletter Update Thursday, 19th April 2012

FTSE-100


Graph - 190412

Source: Bloomberg

FTSE-100 statistics


Yesterday: -0.4%
Latest: 5,745.3
High: 5,783.9
Low: 5,730.9
Top three: Fresnillo +3.2%

Severn Trent +3.1%

Weir Group  +2.4%

Bottom three: Man Group -7.3%

Resolution -5.9%

Legal & General  -4.8%

Source: Bloomberg

Analyst


Donald Linderyd

(t) +44 (0) 207 382 8421

(e) donald.linderyd@hbmarkets.com


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The Markets

Market opening: FTSE futures, trading 15.0 points up at 7:00am today, indicate a higher opening. The outcome of Spain’s debt auction at 9:30 am today will provide direction as the session progresses.

_

New York: Wall Street lost ground in the final minutes of trade as lacklustre earnings pushed markets into negative territory. The S&P 500 closed 0.4% lower yesterday.

Asia: Following yesterday’s rally, markets remained cautiously range-bound awaiting results of Spain’s longer termed bond auction due today. The Nikkei closed 0.8% lower, while the Hang Seng was trading 0.3% up at 7:00 am.

Continental Europe: Markets slumped on data showing that bad debts held by Spanish banks had surged to 8.2% of their assets. ECB policymaker Jens Weidmann’s statement that Spain should not ask the bank to help tackle its debt woes dampened sentiments further. The German DAX slipped 1.0% and the French CAC 40 closed 1.6% lower.

UK small caps: The FTSE AIM All-Share index gained 1.0% yesterday. To read our latest small cap research, click here.

 

Today’s breakfast menu:

- HB Markets on GKN – Buy; Tesco – Hold; BHP Billiton – Hold; Fresnillo, Hochschild and Bunzl

- UK Bank of England minutes; UK unemployment; US MBA mortgage applications and Eurozone current account

Today’s news

EU banks may see balance sheets shrinking – IMF

The balance sheets of 58 European banks, including BNP Paribas and Deutsche Bank, could shrink by about US$2.6tr, or 7%, in the next two years, if governments are not able to meet fiscal debt targets or if the Eurozone faces shocks that its firewall cannot contain, the International Monetary Fund (IMF) opined in its Global Financial Stability Report released yesterday. Though steps by the EU and the ECB have placated financial markets, global financial risks have not alleviated from six months ago, the IMF added.

Japanese exports rise on surging US demand

Exports from Japan increased 5.9% y-o-y in March, buoyed by car exports to the US, which helped Tokyo narrow its trade deficit to ¥82.6bn. Though comparisons are distorted by March 2011′s earthquake, the growth supports IMF’s projections that Japan’s economy would grow 2% this year.


Read the latest AIM Update now!

Company News

UK companies reporting today

 

Mkt. Cap.

(£)

Ticker

Sector

Period

Expected
sales (£)

Expected
pre-tax (£)

African Barrick Gold

1.5bn

ABG.L

Mining

Q1 2012

US$262.7m

US$62.4m

WH Smith

716.6m

SMWH.L

Retail

H1 2012

-

66.0m

Ladbrokes

1.4bn

LAD.L

Gambling

Q1 2012

-

-

Debenhams

1.0bn

DEB.L

Retail

H1 2012

1.2bn

125.3m

Persimmon

1.9bn

PSN.L

Homebuilding

Q1 2012

-

-

Hammerson

2.9bn

HMSO.L

Property

Q1 2012

-

-

International Power

20.4bn

IPR.L

Utilities

Q1 2012

-

-

Anglo American

29.4bn

AAL.L

Mining

Trading update

-

-

SABMiller

39.5bn

SAB.L

Beverages

Trading update

-

-

Hargreaves Lansdown

2.3bn

HL.L

Financials

Q3 2012

-

-

RusPetro

666.7m

RPO.L

Oil & gas

FY2011

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

GKN (GKN.L, 209.2p) – Buy

In an interim statement for Q1 2012 issued yesterday GKN said, trading profit grew 19% y-o-y to £142m as revenue rose 17% to £1.7bn. Trading margin improved 20 basis points to 8.2% and pre-tax profit increased 17% to £125m. GKN’s driveline division, which provides automobile parts, saw a revenue jump of 26% to £847m due to strong performance at Getrag Driveline Products which was acquired last year. The other divisions, aerospace, land systems and power metallurgy witnessed revenue growth of 5%, 9% and 20%, respectively. The management said, despite the global economic uncertainty, they expect to make progress this year.

Our view: GKN is expected to reap the benefits from the increase in demand for light vehicles, especially in the emerging markets and the rebound in US market. GKN also counts both Boeing and Airbus among its customers and the expansion of production at these companies is expected to boost the aerospace division. The management said that the recent acquisitions have integrated well and are contributing to the overall growth of the company. With margin improvements registered across all of the four divisions and GKN’s clear growth potential, we reiterate our buy rating.

Tesco (TSCO.L, 321.05p) – Hold

Tesco announced results for the 52 weeks ended 25th February 2012 yesterday. Revenue rose 7.4% to £72.0bn. Excluding petrol, the revenue increase was 5.9%. Underlying pre-tax profit was higher by 1.6% to £3.9bn, while reported pre-tax profit climbed 5.3% to £3.8bn. Operating profit from international operations increased 1.7% to £1.1bn and helped the group operating profit rise 1.3% to £3.8bn despite a 1.0% decline in operating profits to £2.5bn at the UK business. Group like-for-like (LFL) sales, including petrol, advanced 2.4% with LFL sales in the UK registering a 2.8% growth. However, excluding petrol, group LFL sales only improved 0.6% and UK LFL sales declined 0.9%. The management unveiled a plan to reinvigorate its UK operations. The plan includes boosting staff in key departments and revisiting the pricing and promotion strategy. A change in store formats is also on the cards, with management expecting floor space additions to be 38% lower than that in FY2012. Tesco plans to increase investment in its online portal by £150m and aims to extend its click and collect network to cover around 85% of the UK. The management announced a reduction in capital expenditure for FY2013 to £3.3bn after spending £3.8bn in FY2012. The management proposed a final dividend of 10.13p per share.

Our view: Tesco’s plan to boost the UK operations is necessary, as rivals are eating into its market share. However, Tesco still holds around double the market share than its closest rival. The plan to reduce selling space, expanding the click-and-collect format and improving the fresh food department seems to have been in line with analyst expectations. Though this plan could help the retailer re-boot UK operations, macroeconomic headwinds persist as cash-strapped customers are curbing expenses. Given today’s announcement, we do not think the plan is enough to turn Tesco around anytime soon to change our view on the stock.

BHP Billiton (BLT.L, 1,943p) – Hold

BHP Billiton released a production update for Q3 2012 and nine months period to 31st March 2012 yesterday. The management warned that strikes and heavy rainfall at its Queensland mine continues to affect production. They added that depletion of stockpiles could have a severe impact on future performance. On the other hand, iron ore production increased a record 20% y-o-y to 118.6m tonnes during the nine months period, but declined 8% in Q3 2012 vis-à-vis Q2 2012. Production of metallurgical coal edged up 1% compared to the first nine months of FY2012 while q-o-q production declined 14%. Production of petroleum products increased 58% q-o-q to 56.5m barrels of oil equivalent (boe), but shrank 3% compared to the previous quarter. Copper production at Chile’s Escondida mine improved 9% q-o-q, helped by higher ore grades. Though the management expects production at Escondida to improve as mining activity progresses, they left the annual production target for copper unrevised. Annual target of iron ore production was also kept unchanged as scheduled maintenance activities are expected to slow down production in Q4 2012. Production at the petroleum division in on track to meet the annual target of 225m boe.

Our view: We appreciate BHP Billiton’s asset quality and the broad spectrum of its mining activities. However, these positives are already factored into the share price, which commands a premium over Rio. BHP’s shares trade at a P/E of 8.7x compared to Rio’s 7.6x. Also, the management warned that strike at its coal mine in Queensland, Australia is expected to affect full year production and has depleted reserve stockpiles. Coal is one of the major revenue earners for the company. Considering these factors, we prefer Rio Tinto.

Fresnillo (FRES.L, 1,624p)

Fresnillo issued a production update for Q1 2012 ended 31st March 2012 yesterday. Gold production rose 26.3% to 121,792 ounces, while silver production decreased 2.9% to 9.8m ounces, in line with expectations. Production of lead and zinc increased 19.4% and 18.1% to 6,265 tonnes and 6,925 tonnes, respectively. The Noche Buena mine in Mexico commenced commercial production in March. Further, the management reported that construction of the $106.8m dynamic leaching plant at Herradura, and the exploration programme at San Julián, Orisyvo and Centauro Deep, are both on track.

Hochschild (HOC.L, 490.3p)

The production results for Q1 2012 showed Hochschild produced 5.1m attributable silver equivalent ounces, which includes 3.4m ounces of silver and 28.3 thousand ounces of gold. This indicates that the company is on track to achieve FY 2012 targeted production of 20.0m attributable silver equivalent ounces. During the quarter, the average realisable price per ounce of silver inched up slightly to US$36.9 from $36.2 in Q1 2011. The average realisable price per ounce gold jumped to US$1,782.1 from US$1,391.4 in the previous year. Furthermore, the company earmarked US$90m, to carry forward its exploration strategy this year, which is an increase of 29% over the previous year.

Bunzl (BNZL.L, 1,018p)

Bunzl released a trading update for Q1 2012 ended 31st March 2012 yesterday. Revenue grew 7% y-o-y on a constant currency basis. Underlying revenue was 4% higher y-o-y due to strong growth in North America and in Rest of the World. Growth in revenue from UK & Ireland was helped by acquisitions while revenue from Continental Europe was more or less stable. The company said acquisition in 2011 helped improve operating margins. It further informed that a pipeline of targets for acquisition has been set and will drive future growth.


Make use of your 2012/2013 ISA Allowance now! Why wait?

Economic News

Economic releases due today

Region

Release

Indicator

Period

Previous

Expected

Eurozone Consumer Confidence Index April -19.1 -19.0
US Initial Jobless Claims Thousands 14th April 380.0 370.0
US Continuing Claims Thousands 7th April 3,251.0 3,300.0
US Bloomberg Consumer Comfort Index 15th April -32.8 -
US Bloomberg Economic Expectations Index April 1.0 -
US Philadelphia Fed. Business Outlook Index April 12.5 12.0
US Existing Home Sales Millions March 4.6 4.6
US Existing Home Sales m-o-m % March -0.9 0.7
US Leading Indicators % March 0.7 0.2

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

UK Bank of England minutes

The minutes of the Bank of England (BoE)’s Monetary Policy Committee meeting, released yesterday, showed members unanimously voted to hold the key interest rate stable at 0.5%. David Miles was the only member seeking an £25bn extension to the BoE’s asset purchase programme. The minutes also revealed that members thought the fall in inflation may be slower than earlier envisaged as rising oil prices pushes up overall prices.

Our view: The overwhelming majority voting against the expansion of BoE’s asset purchase programme dampens market expectations of the Bank pumping more fresh money into the economy. An increase of the £325bn programme would be unwarranted as economic indicators are slowly improving and inflation is stubbornly high.

UK unemployment

The unemployment rate in the UK fell to 8.3%, the Office of National Statistics said yesterday. The number of unemployed fell by 35,000 to 2.65m in the three months to February. Youth unemployment declined to 22.2% from 22.5% in the previous quarter. In March, the claimant count – a gauge of number of people claiming jobless benefits – rose at a slower pace of 3,600 from February to 1.61m. The claimant rate was unchanged at 4.9%.

Our view: The unemployment data confounded economists’ expectations of the unemployment rate holding steady while the claimant count was expected to increase by 6,000. This is the first indication that the labour market could be stabilising as the economy regains momentum. The data suggests that hiring in the private sector is compensating for the cut in public sector jobs. This is good news for the government that is facing increasing criticism for being too aggressive in cutting government spending and derailing the fragile recovery.

US MBA mortgage applications

The Mortgage Bankers Association reported a 6.9% w-o-w increase in total mortgage applications for the week ended 13th April 2012. Applications for refinancing rose 13.5%, while applications for new home purchases shrank 11.2%. The four-week moving average, which smoothes out seasonal spikes, increased 1.6% for the headline index. This average surged 2.4% for refinancing applications and retreated 0.5% for fresh purchase applications. The interest rate for a 30-year fixed rate mortgage decreased to 4.05%, giving up 5 basis points from 4.10% the previous week.

Our view: Mortgage applications shook off the downtrend seen through February and March as refinancing picked up following a drop in interest rates. Interest rates declined in the past week on renewed concerns about the Eurozone debt crisis. The 30-year fixed rate was at the lowest level since the survey in early February. The decline in new purchase applications continued for a second week, reflecting buyers’ apprehension about entering the housing market.

Eurozone current account

The Eurozone current account recorded a seasonally adjusted deficit of €1.3bn in February reversing the €3.7bn surplus in January, the European Central Bank said yesterday.

Later this week…

Companies
reporting

 

Mkt. Cap. (£)

Ticker

Sector

Period

Expected sales (£)

Expected pre-tax (£)

Friday 20th April

 

 

William Hill

1.8bn

WMH.L

Gambling

Q1 2012

-

-

IMI

2.9bn

IMI.L

Basic mats.

Q1 2012

-

-

Rotork

1.7bn

ROR.L

Electronics

Trading update

-

-

Spectris

2.1bn

SXS.L

Electronics

Trading update

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

Economic
releases

Region

Release

Indicator

Period

Previous

Expected

Friday 20th April      
UK Retail Sales Ex Auto Fuel m-o-m % March -0.8 0.4
UK Retail Sales Ex Auto Fuel y-o-y % March 1.0 1.3
UK Retail Sales w/Auto Fuel m-o-m % March -0.8 0.5
UK Retail Sales w/Auto Fuel y-o-y % March 1.0 1.5
UK Nationwide Consumer Confidence Index March 44.0 -
Germany Producer Prices m-o-m % March 0.4 0.4
Germany Producer Prices y-o-y % March 3.2 3.1
Germany IFO – Business Climate Index April 109.8 109.5
Germany IFO – Current Assessment Index April 117.4 117.0
Germany IFO – Expectations Index April 102.7 102.3

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts


Recommendations

During the three months to end-March 2012, the number of stocks on which HB Markets has published recommendations was 183, and the recommendations were as follows: Buy – 87; Speculative Buy – 2; Hold – 75; Sell – 19.

Full definitions of the recommendations used by HB Markets in its publications and their respective meanings can be found on our website here.

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