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Manufacturing activity in China hits eight-month low

Newsletter Update wednesday, 1st August 2012


FTSE-100


Graph - 010812

Source: Bloomberg

FTSE-100 statistics


Yesterday: -1.0%
Latest: 5,635.3
High: 5,695.5
Low: 5,635.3
Top three: Vedanta +5.2%
Sainsbury +0.9%
Unilever +0.8%
Bottom three: CRH -5.8%
BP -4.4%
Shire -3.9%

Source: Bloomberg

Compiled by


Jim Dolan

(t) +44 (0) 207 382 8384
(e) jim.dolan@hbmarkets.com


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The Markets

Market opening: Markets remain sceptical ahead of the US Fed policy decision later today. The FTSE 100 futures were trading 12 points down at 7:00am.

New York: Wall Street closed lower as investors adopted a wait-and-watch approach ahead of the US Fed policy decision later today and the ECB meet on Thursday. The S&P 500 closed 0.4% down.

Asia: Weak Chinese manufacturing data and worries over stimulus action from the US Fed and the ECB undermined investor sentiment. The Nikkei 225 closed 0.6% lower, while the Hang Seng was trading 0.4% up at 7:00am.

Continental Europe: European equities closed lower on renewed doubts over the ECB taking concrete steps to resolve the debt crisis. Germany’s Finance Ministry reinforcing opposition to giving the European Stability Mechanism a full banking license compounded investor concerns. The German DAX closed flat, while the French CAC 40 was down 0.9%.

UK small caps: The FTSE AIM All-Share index was down 0.2% yesterday. To read our latest small cap research, click here.

Today’s breakfast menu:

- HB Markets on Fresnillo – Hold; Kefi Minerals – Speculative Buy; Vedanta Resources – Buy and Xstrata – Hold

- UK GfK consumer confidence survey; Eurozone CPI estimate; US consumer confidence

 

Today’s news

Manufacturing activity in China hits eight-month low

China’s official factory purchasing managers’ index (PMI) fell to 50.1 in July, from 50.2 in June, reaching an eight-month low. Reading of output and new export orders were at their lowest levels since November. Separately, the rival HSBC PMI stood at a seasonally adjusted 49.3 in July.

Eurozone unemployment reaches record levels

Unemployment across the Eurozone climbed to 11.2% in June, the highest level since the Euro formation, Eurostat data displayed yesterday. High unemployment rates were recorded in Spain (24.8%), Portugal (15.4%), Ireland (14.8%), and Slovakia (13.8%).



Read the latest AIM Update now!

Company News

UK companies reporting today
Time

 

Mkt. Cap.

(£)

Ticker

Sector

Period

Expected
sales (£)

Expected
EPS (p)

5:00am Standard Chartered

34.4bn

STAN.L

Financial

H1 2012 US$9.4bn

1.07

7:00am Avocet Mining

139.7m

AVM.L

Mining

H1 2012 -

0.05

7:00am Rightmove

1.6bn

RMV.L

Internet

H1 2012 53.6m

26.90

7:00am Filtrona

991.0m

FLTR.L

Basic mats

H1 2012 -

-

7:00am Rexam

3.8bn

REX.L

Industrials

H1 2012 2.4bn

18.00

7:00am Jupiter Fund Mngmt.

978.1m

JUP.L

Financials

H1 2012 120.5m

8.80

7:00am Next

5.3bn

NXT.L

Retail

Trading update -

-

7:00am F&C Asset Mngmt.

454.3m

FCAM.L

Financials

H1 2012 131.6m

3.33

12:00pm Shire

10.7bn

SHP.L

Pharmaceuticals

Q2 2012 -

-

  Taylor Wimpey

1.4bn

TW/.L

Home builders

H1 2012 906.8m

1.70

  Antofagasta

10.5bn

ANTO.L

Mining

H1 2012 US$3.3bn

0.67

  Eurasian Natural Res.

4.8bn

ENRC.L

Mining

H1 2012 US$3.4bn

0.44

  WS Atkins

789.1m

ATK.L

Comm.servs

Q1 2013 -

-

               

Sources: Bloomberg, Reuters, Consensus forecasts

Fresnillo (FRES.L, 1,456p) – Hold

Fresnillo released results for H1 2012 ended 30th June 2012 yesterday. Revenues were up 2.7% y-o-y to US$1.09bn as higher gold prices and record gold production compensated for declining silver prices and poor silver output stemming from lower ore grades at the flagship Fresnillo mine. Production costs climbed 37.3% owing to start-up expenses at Noche Buena mine and increased operational costs from the Saucito mine. Consequently, EBITDA declined 9.2% to US$684.4m. Profit before tax decreased 22.3% to US$603.3m and net profit fell 21.4% to US$434.7m. Net profit attributable to shareholders was down 25% to US$366.7m. Basic EPS decreased 25% to US$0.51. Gold production was up 20.5% to 248,795 ounces (oz), while silver production, including Silverstream, fell 6.5% to 20,072 kilo ounces (koz). In terms of price realizations, Gold fetched US$1,645.5 per oz, up 12.5%, whereas silver prices fell 13.3% to US$30.97 per oz. The San Julian pre-feasibility study was on track to be completed by H2 2012. Also, there were encouraging exploration results at Noche Buena with increasing gold reserves. CEO Jaime LomelĂ­n was pleased with the record gold production levels in H1 2012 but added that the challenging economic climate had put downward pressure on silver prices. The management said the company was on track to produce 41 million oz of silver and 460,000 oz of gold in 2012. The company announced that Octavio Alvidrez would take over as CEO from Jaime Lomelin, who would soon retire. The Board cut the interim dividend to US$0.15 per share from US$0.21 per share.

Our view: Fresnillo’s H1 2012 results were marred by lower silver prices, as uncertain economic environment continued to put downward pressure on pricing. The decline in silver production at its flagship Fresnillo mine remain a concern as production levels will not improve until newer mines are in full operation. Even as management remains confident of meeting production targets, banking on the new Saucito mine to yield high output, we remain cautious on the stock and do not see a near-term recovery in demand for silver. We maintain a Hold recommendation.

Kefi Minerals (KEFI.L, 3.02p) – Speculative Buy

Yesterday, Kefi Minerals released an exploration update for its Jibal Qutman Licence in Saudi Arabia. The update confirmed the presence of high-grade gold and silver in the deposits. The grades were 27.7 grams per tonne (g/t) of gold and 262 g/t of silver at 3.2 metres. Managing Director Jeff Rayner was pleased with the encouraging results at the Jibal Qutman Licence and said the company would build on this initial phase and also undertake diamond drilling in the current quarter. KEFI Minerals is the operator of the Gold & Minerals Joint Venture at Jibal Qutman Licence with a 40% stake. Abdul Rahman Saad Al-Rashid & Sons Company Limited owns the balance 60%.

Our view: The exploration update revealed promising results for Kefi Minerals at the Jibal Qutman Licence in Saudi Arabia. The management said that it would carry out further studies to identify new regions for drilling and would also begin diamond drilling at the site. Furthermore, the Selib North prospect has also seen steady progress. Despite the fact that the results pertain to early stages of the project, we are optimistic that the company could deliver exploration successes going forward. We issue a Speculative Buy rating on the stock.

Vedanta Resources (VED.L, 976p) – Buy

Vedanta Resources issued a production update for Q1 2013 ended 30th June 2012 yesterday. Total revenue increased 9% to US$3.7bn. EBITDA rose 27% y-o-y to US$1.3bn. Core earnings increased 27%, as strong growth in power sales offset the impact of lower metal prices and zinc volumes. Integrated silver production increased 70% to 2.6 million ounces (oz) while integrated lead production rose 79% to 29,000 tonnes, boosted by a ramp-up at the SK mine. Integrated zinc production was 157,000 tonnes. Total production of zinc-lead metal-in-concentrate and zinc metal was 106,000 tonnes. The average daily gross operated production increased 20% to 206,963 barrels of oil equivalent (boe). Oil and Gas revenues were US$822.7m. Iron ore sales were 2.9 million tonnes (mt) whereas production of iron ore was 3.4mt versus 4.4mt in Q1 2012. The decrease was due to the Karnataka mining ban and continued logistics constraints in Goa, India. Zambian copper cathode output rose 12 % y-o-y to 41,000 tonnes. Aluminium production increased 7% to 185,000 tonnes on a LFL basis. The company sold 2,329 million units of power, substantially higher than 1,415m units in Q1 2012, pushing up the power revenue by 29% to US$157.8m. Management said the consolidation of the business was on track for completion in CY2012. Vedanta Resources closed 5.2% up on the London Stock Exchange yesterday.

Our view: Vedanta reported a strong production update with significant increase in core earnings, led by a 70% increase in silver production and robust performance at its power division. The company saw steady growth across a majority of its portfolio and the Karnataka mining ban had a lesser bearing on overall performance. Robust growth in its commercial power sales and ramping up of its Oil & Gas, and copper production will fuel growth for the company going forward. Furthermore, the stock is currently available at an attractive valuation, having declined almost 38% from its peak of £1,502.00 in February this year. We believe the stock is likely to see a meaningful appreciation in the future. We upgrade the stock to a Buy rating.

Xstrata (XTA.L, 848.1p) – Hold

Xstrata released a production report for H1 2012 ended 30th June yesterday. Total mined copper output rose 7%q-o-q in Q2 2012, helped by increased volumes from the recently commissioned Antamina expansion. However, volumes in H1 2012 were down 18% y-o-y to 354,612 tonnes, owing to replacement of ageing mines and expansion projects, which would boost production in H2 2012. Consolidated coal output increased 13% to 43.4 million tonnes (mt) due to increased thermal and coking coal volumes. Nickel production volumes were up 3% to 52,800 tonnes, led by strong performance at the Sudbury and Raglan mines. Zinc production remained flat compared to H1 2011. Lead metal production increased 11% to 119,785 tonnes, boosted by higher production at Mount Isa Mines and improvements to shipping schedules for lead bullion to the UK refinery. Gold production declined 28% on account of lower volumes and poor grades at Ernest Henry and Tintaya. In a separate statement, the company said that it had begun open pit mining at the Mount Margaret copper project in north-west Queensland, with first ore production expected by the end of August.

Our view: Xstrata reported mixed results in its production report, underscored by a significant drop in copper output. Copper production levels are expected to remain lower until the transition from older end-of-life mines to newer mines is completed. The expansion activities in H1 2012 are expected to yield higher production levels towards the end of FY2012. The thermal coal business is likely to benefit further from growing demand in emerging markets. The merger with commodities giant Glencore is currently locked as Glencore continues to hold talks with Qatar Holdings over the terms of the proposed deal. Given that an additional ten major projects would be commissioned in 2012, the company is likely to see steady growth in the medium to long-term. We upgrade our rating to Hold.


Read the latest HB Markets research now!

Economic News

Economic releases due today
Time

Region

Release

Indicator

Period

Previous

Expected

0:01am UK BRC Shop Price Index y-o-y% July 1.1 -
30th -31st July UK Nationwide House prices SA m-o-m% July -0.6 -0.2
30th-31st July UK Nationwide House prices NSA y-o-y % July -1.5 -1.9
8:55am Germany PMI Manufacturing Index July 43.3 43.3
9:00am Eurozone PMI Manufacturing Index July 44.1 44.1
9:30am UK PMI Manufacturing Index July 48.6 48.4
12:00pm US MBA Mortgage Applications w-o-w% 27th July 0.9 -
1:15pm US ADP Employment Change Thousands July 176.0 120.0
1:58pm US Markit US PMI Final Index July - 51.8
3:00pm US ISM Manufacturing Index July 49.7 50.2
3:00pm US ISM Prices Paid Index July 37.0 40.0
3:00pm US Construction Spending m-o-m% June 0.9 0.4
7:15pm US FOMC Rate Decision   1st August 0.3 0.3
1st-8th August UK Halifax House Prices SA m-o-m% July 1.0 -
1st-8th August UK Halifax House Price 3m/year July -0.5 -
10:00pm US Total Vehicle Sales Millions July 14.1 14.0
10:00pm US Domestic Vehicle Sales Millions July 11.1 11.0
             

Sources: Bloomberg, Reuters, Consensus forecasts

UK GfK consumer confidence survey

Gfk’s monthly survey released yesterday revealed the consumer confidence index for July was -29, same as the last month and in line with market expectations. The measure for the general economic situation over the past year dipped 1 point to -59. Expectations for the general economic situation over the next 12 months gained 1 point to -30. The balance of consumers forecasting their personal finances over the next year edged up 1 point to -8, whereas the measure of changes in personal finances during the last 12 months remained the same at -23. Consumers’ assessment of whether the economic climate was right for making major purchases, nudged up two points to -26, but that was still 5 points lower than in July 2011.

Eurozone CPI estimate

Eurozone CPI rose 2.4% on an annualized basis in July, remaining unchanged for the third consecutive month, the Eurostat said yesterday. Economists had expected Eurozone inflation to be 2.5% in July. The inflation figure for July was above the European Central Bank’s core target of maintaining inflation just below 2% by the end of the year.

US consumer confidence

The US consumer confidence index rose to 65.9 in July, from the revised 62.7 in June, the Conference Board said yesterday. Economists had forecasted a reading of 61.5. The present situation index, a gauge of consumers’ assessment of current economic conditions, dipped to 46.2 from 46.6 the previous month. Consumer expectations for economic activity over the next six months climbed to 79.1 in July from a revised 73.4 in June. The current employment differential fell slightly to -33.0 from -32.9 in June, as the decrease in consumers reporting jobs as “plentiful” outpaced the decline in consumers reporting jobs as “hard to get”.

Later this week…

Companies
reporting

Time

 

Mkt. Cap. (£)

Ticker

Sector

Period

Expected sales (£)

Expected EPS (p)

   

 

 

 

   

 

Thursday 2nd August

 

 

7:00am RSA Insurance

3.9bn

RSA.L

Insurance

H1 2012 -

7.20

7:00am BAE Systems

9.9bn

BA/.L

Aero & def

H1 2012 9.2bn

17.90

7:00am Smith & Nephew

5.9bn

SN/.L

Healthcare

H1 2012 -

-

7:30am Ladbrokes

1.4bn

LAD.L

Gambling

H1 2012 531.1m

8.45

  Spirent Comm.

1.1bn

SPT.L

Telecom

H1 2012 US$274.1m

0.07

  Aggreko

5.3bn

AGK.L

Comm. servs

H1 2012 738.7m

-

  RPS

511.3m

RPS.L

Comm. servs

H1 2012 -

-

  Segro

1.7bn

SGRO.L

Property

H1 2012 162.1m

8.74

  Schroders

3.5bn

SDR.L

Financial

H1 2012 556.8m

51.52

  Millennium & Copthorne Hotels

1.5bn

MLC.L

Hospitality

H1 2012 -

-

   

 

 

 

   

 

Friday 3rd August

 

 

7:00am Int. Consol. Airlines

2.7bn

IAG.L

Airlines

H1 2012 -

-

7:00am Inmarsat

2.1bn

ISAT.L

Telecom

H1 2012 US$658.2m

0.34

7:00am Royal Bank of Scotland

22.5bn

RBS.L

Financial

H1 2012 12.5bn

5.66

7:00am Diploma

510.4m

DPLM.L

Consumer

Q3 2012 -

-

  Rentokil Initial

1.3bn

RTO.L

Comm. servs

H1 2012 -

-

  Logica

1.7bn

LOG.L

Technology

H1 2012 1.9bn

-

  Rank Group

463.3m

RNK.L

Gambling

FY 2012 -

-

               

Sources: Bloomberg, Reuters, Consensus forecasts

Economic
releases

Time

Region

Release

Indicator

Period

Previous

Expected

             
Thursday 2nd August        
9:30am UK PMI Construction Index July 48.2 48.7
10:00am Eurozone PPI m-o-m% June -0.5 -0.4
10:00am Eurozone PPI y-o-y% June 2.3 1.9
12:00pm UK BOE Asset Purchase Target Billions August 375.0 375.0
12:00pm UK BOE Announces Rates   2nd August 0.5 0.5
12:30pm US Challenger Job Cuts y-o-y% July -9.4 -
12:45pm Eurozone ECB Announces Interest Rates   2nd August 0.8 0.8
1:00pm US RBC Consumer Outlook Index Index August 47.0 -
1:30pm US Initial Jobless Claims Thousands 28th July 353.0 370.0
1:30pm US Continuing Claims Thousands 21st July 3,287.0 3,288.0
2:45pm US ISM New York Index July 49.7 -
2:45pm US Bloomberg Consumer Comfort Index 29th July -38.5 -
3:00pm US Factory Orders % June 0.7 0.5
2nd-3rd August US ICSC Chain Store Sales y-o-y% July 0.2 -
             
Friday 3rd August        
8:55am Germany PMI Services Index July 49.7 49.7
9:00am Eurozone PMI Composite Index July 46.4 46.4
9:00am Eurozone PMI Services Index July 47.6 47.6
9:30am UK PMI Services Index July 51.3 51.6
9:30am UK Official Reserves (Changes) US$m July 914 -
10:00am Eurozone Retail Sales m-o-m% June 0.6 -0.1
10:00am Eurozone Retail Sales y-o-y% June -1.6 -1.9
1:30pm US Change in Nonfarm Payrolls Thousands July 80.0 100.0
1:30pm US Change in Private Payrolls Thousands July 84.0 110.0
1:30pm US Change in Manufacturing Payrolls Thousands July 11.0 10.0
1:30pm US Unemployment Rate % July 8.2 8.2
1:30pm US Avg Hourly Earning All Emp. m-o-m% July 0.3 0.2
1:30pm US Avg Hourly Earning All Emp. y-o-y% July 2.0 1.7
1:30pm US Avg Weekly Hours All Employees Hours July 34.5 34.5
1:30pm US Change in Household Employment Thousands July 128.0 -
1:30pm US Underemployment Rate (U6) % July 14.9 -
3:00pm US ISM Non-Manufacturing Composite Index July 52.1 52.0
             

Sources: Bloomberg, Reuters, Consensus forecasts


Recommendations

During the three months to end-July 2012, the number of stocks on which HB Markets has published recommendations was 149, and the recommendations were as follows: Buy – 70; Speculative Buy – 10; Hold – 51;
Sell – 18

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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