Market opening: FTSE futures were trading one point higher, indicating markets could open flat with an upward bias as investors eye employment data scheduled for release today.
New York: Expectation-beating earnings from Coca-Cola and J&J were the highlights of overall positive earnings data yesterday. This helped the S&P 500 end 1.6% higher.
Asia: The well-received Spanish bond auction and healthy earnings in the US boosted markets. The Nikkei stemmed this week’s losses, closing 2.1% higher after BoJ’s Deputy Governor, Kiyohiko Nishimura, promised policy intervention to support the economy, if required. Meanwhile, the Hang Seng was trading 1.2% up at 7:00 am.
Continental Europe: Upbeat US earnings, unfaltering economic sentiment in Germany, and a better than expected Spanish bond auction lifted markets. The German DAX and the French CAC 40 both closed 2.7% higher.
UK small caps: The FTSE AIM All-Share index gained 0.2% yesterday. To read our latest small cap research, click here.
Spain wows to retaliate as Argentina seizes YPF control
Spain threatened economic sanctions against Argentina after the South American nation unveiled plans to expropriate Spanish company Repsol’s controlling stake in YPF. YPF is Argentina’s largest oil producer. Repsol, too, vowed to fight the takeover, terming it ‘unjustified’. Repsol valued YPF at US$18bn and said it would seek compensation accordingly. Argentina flatly refused to accept this price for YPF. On Monday, Argentina’s President, Cristina Fernandez, ordered the renationalisation of YPF in a populist move aimed at curbing the nation’s surging fuel import bill even as state finances worsen. Argentina is also at odds with Britain over oil exploration activities in the Falkland Islands, over which it claims sovereignty.
In a trading update for H2 2012 to 31st March 2012, Burberry said revenue soared by 18% on an underlying basis to £1.0bn as underlying retail revenue climbed 23% to £743m. Underlying wholesale revenue increased 7% to £230m and underlying licensing revenue increased 5% to £54m. Like-for-like (LFL) retail sales increased 13% in Q3 2012 and 11% in Q4 2012 taking H1 2012 LFL sales to 12%. In 2012-13, the company plans to increase average selling space by 12-14% and anticipates licensing revenue to hold steady y-o-y. H1 2012 wholesale revenue is expected to increase in mid single-digi.
Our view: We like Burberry’s structural drivers, geographical diversification, its product mix and strong branding. However, taking into consideration the share price rise of 22% in the past three months and the slow sales growth in H1 2012, we maintain our hold rating. In H1 2012, total revenue increased 29% y-o-y and comparable retail sales grew 16%.
Marks & Spencer (LON:MKS)
Marks & Spencer released a trading statement for the 13 weeks to 31st March 2011 yesterday. In Q4 2011, group sales rose 0.8% and sales in the UK increased 1.2%. Sales at M&S Direct advanced 22.8%. International sales declined 2% as the economic conditions in Greece and Ireland outweighed the strong growth in India, China and the Gulf. Like-for-like (LFL) sales in the UK shrank 0.7% while that at the food division increased 1%. LFL sales at the general merchandise, which includes clothing and homeware, decreased 2.8%. Clothing sales suffered as the retailer miscalculated demand for popular lines of women wear and ran out-of-stock. The management said implementation of new concepts, such as having delicatessens in-store, would cost about £500m, £100m lesser than previously estimated. They said the short-term trading outlook remains challenging but expects 2012-13 gross margins to improve 0-0.25%. Operating costs are expected to rise 3-5% as inflation, depreciation and expansion plans offset savings. Planned new footage additions would be 3% in the UK and around 20% in International markets and capital expenditure is expected to be around £825m.
Our view: M&S’s exposure to emerging markets of India and China, and its food business continue to drive growth and are expected to help the retailer perform despite the gloomy economic environment in the UK. The company’s expectation of the store revamping to cost £100m less than budgeted is an added sweetener, to a stock providing a yield close to 5%, self-help potential and comes at a substantial valuation discount to peers.
Rio Tinto (LON:RIO)
Rio Tinto released a production update for Q1 2012 yesterday. Iron ore production increased 10% y-o-y but declined 13% q-o-q to 59m tonnes. Iron ore shipment increased 2% y-o-y to 54m tonnes. Expansion at the Pilbara mine in Australia increased capacity by 5m tonnes to 230m tonnes while cyclonic activity in Australia hampered shipments. As anticipated, copper production declined 18% y-o-y and 13% q-o-q due to lower grades at Kennecott Utah Copper mine. Production of bauxite, alumina and coking coal increased 10% y-o-y, 13% y-o-y and 5% y-o-y respectively. The company extended its stake in Richards Bay Minerals to 74% after the acquisition of BHP Billiton’s 37% stake. The miner is also reviewing exit options for its diamond business. The shares re-purchase programme concluded on 26th March and the company paid a total consideration of US$7.0bn to buy back 116.9m shares at an average price of £37.47. The miner set the iron ore production target at 250m tonnes and mined and refined copper production target at 600,000 and 320,000 tonnes, respectively. The management described the quarter as ‘solid’ due largely from consistently high operating performance and lower impact from severe weather, but expected the volatility to continue.
Our view: The impact of weather, though not as severe as that in the previous year, hampered production and shipment of iron-ore from Australia. And most analysts’ expect the miner to recover the lost production as the year progresses. China, Rio’s largest market, reported a record 10% m-o-m increase in steel production (for which iron-ore is the main ingredient) in March. The growing demand for iron ore is expected to continue to drive Rio’s growth and support a relatively attractive valuation compared to peers.
Daily Mail (LON:DMGT)
Daily Mail issued a trading update for H1 2012 ended 31st March 2012 yesterday. Revenue fell 2% y-o-y, on a reported basis, but was up 2.0% on an underlying basis. Both operating profit and pre-tax profit is expected to be lower than that in H1 2011. Print advertising continued to weaken, however, the growth in the circulation and digital revenue compensated for this weakness. The company expects to incur an exceptional charge of around £40m in H2 2012 related to the relocation of its printing facilities to Thurrock. The management said the outlook for the year remains unchanged.
Euromoney Institutional Investor (LON:ERM)
Euromoney Institutional Investor said, in a trading statement for H1 2012, that revenue is expected to increase 13% to £189m and underlying revenue growth could be around 5%. Adjusted net profit is expected to be at least £47m (compared to £41.6m in H1 2012) with operating margin steady at 30%. The proportion of revenue from subscription increased to 53% from 49% in the previous year and revenue from the subscription segment increased 22%. The management said, though overall trading conditions were in line with expectations, advertising revenue (13% of total revenue) continues to be challenging. The outlook for the events business, for which the third quarter is crucial, is positive.
UK consumer price index
Consumer prices rose 3.5% y-o-y in March, after advancing 3.4% y-o-y in February, the Office of National Statistics said yesterday. On a monthly basis, the rise in prices decelerated to 0.3% m-o-m compared 0.6% in February. This takes Q1 2012 inflation to 3.5%, slightly above the 3.35% projected in the Bank of England’s February inflation report. Excluding food, energy and alcohol prices, core inflation edged up to 2.5% in March from 2.4% in the previous month.
Our view: Consumer prices rose as promotion activity at supermarkets declined y-o-y. Clothing and footwear prices increased 2.2% y-o-y compared to 1.1% in March 2011 and food and non-alcoholic beverage prices decreased 0.5% against a 1.4% fall in previous year. Inflation declining slower than that forecasted by the Bank of England will make it harder for the central bank to justify its loose monetary policy.
German ZEW survey
The economic sentiment in Germany edged up to 23.4 points in April compared to 22.3 in March, the ZEW Institute said yesterday. The index measuring the current situation rose to 40.7 points from 37.6 points the previous month.
Our view: The survey beat economists’ expectations of a fall in economic sentiment to 19.0, and the current situation to worsen to 35.0. However, the sideways movement of the main index of economic sentiments suggests investor confidence may begin to wane as economic conditions in Germany’s major trading partners worsen.
US industrial production and capacity utilisation
Industrial production, which measures output at factories, mines and utilities, remained unchanged in March compared to February, the US Federal Reserve said yesterday. Output at mines rose 0.2% and activity at utilities increased 1.5%. However, a 0.2% decline in manufacturing activity, which constitutes about 75% of industrial output, offset these increases, resulting in an unchanged reading of industrial production. For Q1 2012, industrial production is 5.4% ahead compared to the previous year, and manufacturing production has risen 10.4% y-o-y. The same report showed capacity utilisation declined to 78.6% in March after an upward revision to 78.7% in February. March’s reading is 1.7% below the long-term average.
Our view: Flat industrial production failed to meet consensus expectations of a 0.3% rise, while capacity utilisation declined a little less than the 78.5 anticipated. Though manufacturing declined for the month, expansion during Q1 2012 suggests the economy is recovering gradually. Capacity utilisation, used to determine the scope for further growth in output without feeding inflation, is also well below its long term average, potentially leaving room for further stimulus, should it be needed.
Eurozone consumer price index
Consumer prices accelerated 1.3% m-o-m and 2.7% y-o-y in March, the Eurostat said yesterday, revising the annual preliminary estimate from the 2.6% y-o-y increase reported earlier. In February, consumer prices increased 0.5% m-o-m and 2.7% y-o-y. Economists expected inflation to be slightly lower at 1.2% m-o-m and 2.6% y-o-y.
US housing starts and building permits
Builders broke ground on fewer homes in March as housing starts slipped 5.8% m-o-m, but increased 10.3% y-o-y to 654,000, the US Department of Commerce said yesterday. Housing starts declined mainly due to a 16.9% drop in construction of multi-unit homes. The number for February was revised downwards to 694,000 from 698,000. Building permits rose 4.5% m-o-m and 30.1% y-o-y to 747,000 in March, the highest level since September 2008, the Commerce Department added.