The FTSE 100 was down 46.8 points at 5403.1 at 12:04 pm. Weaker commodity prices continued to weigh on the resource stocks, which proved a drag on the benchmark index. Tullow Oil was among the worst off, down over 6 per cent or 46p at 719.5p.
Citigroup weighed in ahead of the banking sector’s reporting season, which kicks in next week, noting that the “worst case” scenario was rapidly becoming the “base case”.
“Our economists now forecast a recession in the second half of 2008, with two consecutive quarter-on-quarter declines in GDP. With external inflationary pressures limiting any early interest rate response the downturn is expected to be prolonged, with GDP growth of 0.5 per cent in 2009 and 0.6 per cent in 2010. This is likely to depress bank earnings until 2010 at the earliest,” said the broker, adding:
“We expect the decline in profitability to prove longer-lasting than the credit crisis itself. Involuntary balance sheet expansion, higher funding costs and the need for stronger capital ratios are likely to result in a permanently lower return on equity for the industry. With the sector continuing to attract a high risk premium we expect valuations to remain subdued.”
Morgan Stanley, on the other hand, was relatively positive on the sector.
“We are moving from Cautious to In-line on Banks and Diversified Financials as we see valuation support with a number of possible catalysts to reduce banks’ underperformance. While our strategic view on the outlook for banking earnings and book value growth remains bearish, and we recognise the range of possible outcomes is particularly wide, as a trading call we find it tougher to continue to be underweight in the market with valuations back to early 90s level for many stocks…” said the broker, adding:
“While we prefer to focus on individual stocks than the overall sector, we are struck that 40 per cent of the European banks we cover are either below or no more than 10 per cent above our bear case valuations, and on average we see only 19 per cent downside to our bear cases. Unless our bear cases become the base or bullish cases, due to widespread systemic issues, we feel much is now priced in.”
The mixed sentiment failed damage to HBOS, which supplemented last night’s record gains with another 1.5p to 306.5p. Alliance & Leicester gained 0.25p to 342.75p and Barclays climbed to 353.5p, up 1.75p. Bradford & Bingley was the strongest, up 6p at 62p.
Also on the upside, the London Stock Exchange was up 48.5p at 873p after Morgan Stanley moved the stock to “equal-weight” from “under-weight”.
On the FTSE 250, Game Group was up 1p at 261p after Goldman Sachs added the stock to its “conviction buy” list.
“We believe there is material upside to consensus estimates for the next two financial years. Based on previous cycles, we believe the current hardware cycle has a minimum two to three years further to run,” said the broker, adding:
“Hardware unit sales typically peak in the third (or even fourth) full year post launch, with higher-margin software unit sales peaking two years later, on average. Additionally, this cycle has clear advantages relative to previous cycles in its breadth, in terms of console choice and demographic appeal.”
In the housing sector, Barratt Developments added another 6.25p to 116.25p. The push up came despite comment from Cazenove, whose analysts feel the recent relief rally in the sector was too optimistic.
“The UK house building sector has risen by more than 30 per cent since 7 July, we were not surprised that there was a relief rally in the sector as the trading updates revealed that no one is going bust, at least not yet. We are however surprised by the scale of the relief rally, driven by short closing. The sector continued its upward momentum yesterday, even in the face of the news from the British Bankers’ Association (BBA), who reported that its members approved just 21,118 new home mortgages in June, a fall of 23 per cent in the month and 67 per cent in the year, and an MPC member voting for a rate rise,” said the broker, adding:
“The lows of early July may have factored in worse news than was actually announced, but it is our view that this is no longer the case and that the newsflow over the summer and the outlook statements during the reporting season in late August and early September will take the shine off the sector again.
“In our view there are several reasons why the relief rally has been overdone: Mortgage approvals are the lead indicator for housing transactions and new homes sales, home loans approved by BBA members have reached new lows every month since March. The level of property transactions in the UK in June, at 77,000 were half the level they were in June last year. Yesterday the Bank of England reported that the slowdown in the UK economy was more pronounced than had been expected.
Land write-downs are only likely to increase as house prices continue to fall and therefore downward pressure on operating margins remains. Financing may be secure and covenants relaxed, but financial gearing in several cases remains high. If price falls and volumes declines continue, we believe they will, further earnings downgrades are likely, so far only Redrow is forecast to make losses in 2009. Estate agents are selling fewer homes than since records began in 1978. Mortgage rates are starting to come down, but crucially for the first time buyer, deposit requirements and arrangement fees are increasing.
“In summary, we believe the UK housing market downturn has entered a new phase. The twin forces of credit famine and the feel bad factor are at play at the same time and we believe that the recent share price rally has run its course.”
Easyjet lost more than 8 per cent or 110p to 1124p after publishing a third quarter trading statement.
“[The statement] highlighted strong unit revenue trends, driven by currency and baggage charges. Management also noted that it had managed to offset over half of the fuel cost increase during this period. However the residual fuel drag and increase in other costs has meant pre-tax profit guidance for the year has been guided to £110-£120, which is 15 per cent below our target,” said Collins Stewart, whose analysts reiterated their “sell” rating on the stock.
A disappointing update also bore on Aquarius Platinum, which was down 31.5p at 539.5p. The miner posted a production update, highlighting higher costs.
Reacting to the news, Evolution Securities reiterated its “buy” rating on the stock.
“The main takeaway from today’s numbers in advanced of the full year financials in couple of weeks were the impact of industrial action on production for the full year and the rising costs associated with higher raw materials prices and industrial activity,” said the broker, adding:
“We will review our numbers in light of today’s announcement to take into account slightly lower production (-1.6 per cent) and higher costs (+6 per cent). However, we do not expect to make material changes to our 2009 numbers.”Reuse content