News Column

MARKET COMMENT: Tobacco M&A Talks Boosts FTSE To First Gains Of Week

July 11, 2014

Jon Darby

LONDON (Alliance News) - The main UK and European stock indices are modestly higher Friday as investors look to pick up some bargains in the aftermath of Thursday's banking sector-driven sell-off. Merger and acquisition activity in the tobacco sector is helping the FTSE 100 outperform the smaller-cap indices in London, and record its first gains of the week.

My mid-morning Friday, the FTSE 100 is up 0.3% at 6,693.02, the FTSE 250 is just fractionally higher at 15,442.38, and the AIM All-share is fractionally lower at 771.17.

"The four-day sell-off that the markets have been subjected to gives the distinct feeling the FTSE is being oversold, and a combination of shorts profit-taking and buy-on-dip traders should see considerably less red on the screens today," said IG analyst Alistair McCaig.

The European majors suffered heavy losses Thursday amid fears of a fresh debt crisis after Portugal's largest listed bank, Banco Espirito Santo, suspended its shares from trading amid problems with a debt payment at its parent company. That fear has been contained for now, and European markets are recovering some of their losses, with the French CAC 40 up 0.6% and the German DAX up 0.2%.

In London, Imperial Tobacco leads FTSE 100 gainers, up 3.2%, after confirming recent speculation it is in talks with US tobacco firms Reynolds American Inc and Lorillard Inc to potentially buy some of their assets. The confirmation from the UK tobacco group follows reports overnight that a merger between the two US names is imminent, with a deal set to be announced as early as next week.

British American Tobacco, which already owns 42% of Reynolds, is also higher Friday, up 1.0% at mid-morning. A ten-year standstill agreement between BAT and Reynolds is set to expire in July 2014, when BAT can make an unsolicited offer for the Reynolds shares it does not already own.

BAT has made no indication at this stage, with some analysts suggesting it will buy more of Reynolds, and some saying its ultimate end game may be a take over of Imperial Tobacco. Whatever happens, the speculation is boosting the UK stocks Friday and will put the US names in focus after the Wall Street opening bell.

Meanwhile, the pound fell from its best levels of the day after some disappointing UK construction output data. Output fell by 1.1% in the month of May, missing economists forecasts for growth of 1.2%. On an annual basis, construction output was up 3.5%, also missing forecasts for growth of 4.6%.

The pound had been ticking higher against the dollar in early trade, but fell after the data to a near session low just above USD1.7120, having peaked previously above USD1.7150. Against the euro, the pound also fell to a session low of EUR1.2572 having previously been trading at EUR1.2595.

Mining stocks are providing a drag to the UK indices Friday, after having been the support on Thursday following a big spike in precious metal prices. Gold peaked at USD1,345.28 per ounce on Thursday, while silver peaked at USD21.57 per ounce. Both metals have consolidated a little and stabilised since then, currently quoted at USD1,336.40 and USD21.41 respectively.

All of the biggest FTSE 100 fallers are miners, with Randgold Resources leading, down 3.3%, Fresnillo down 2.1%, and Rio Tinto down 1.6%.

While the Portuguese banking concern appears to have been contained for now, it has taken a toll on one of London's planned IPO's. Mota-Engil Africa, a subsidiary or Portugal's largest construction group Mota-Engil, had planned to list on London's junior market Friday, but pulled the IPO, citing unfavourable market conditions over the last forty-eight hours. The company becomes the fourth to pull an IPO in light of an unfavourable market so far this year.

There's very little left in the data calendar this week, leaving investors to focus on the merger activity in the tobacco sector, as well as the latest US corporate earnings. US banking results begin Friday, with the second-quarter numbers from mortgage giant Wells Fargo due.

Ahead of the US open, futures trading currently indicates Wall Street will open higher after Thursday's sell-off, with the DJIA and the S&P 500 pointing 0.1% to 0.2% higher.

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Source: Alliance News

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