20.04.12 Friday Morning

This week the focus has been on Spain as tensions increased over its ability to fund itself in the long term with the concerns particularly centred on regional banks’ exposure to an as yet unfinished property market crash. Yields on the benchmark 10 year government debt again went above 6%, with some economists worrying this could drag the Eurozone’s third largest economy, Italy back into the crisis. However, the block’s leaders have sharply reputed claims that Spain may need to tap into the European Financial Stability Facility (EFSF) fund in the future. The chairman of the Eurozone finance ministers Jean-Claude Juncker said that Spain was taking all the necessary steps to get its economy back on track despite the 24% rate of unemployment. He also urged financial markets to ‘behave in a rational way and realise Spain is on track’, in an apparent bid to calm speculation on the secondary markets.

But the evidence may be a little more troubling for policymakers as they are unlikely to hit budget deficit targets this year with the IMF projecting a 6% gap against its goal of 5.3%. Despite this, it is unlikely any bailout will be seen for a while as the government has already managed to raise around half of the 86 Billion Euros its needs to finance itself this year, helped by a relatively successful bond auction on Thursday. Markets had a mixed reaction to these developments with the euro making no strong moves against the US dollar, failing to break away from the 1.31 level and European equity indexes starting Friday morning marginally higher than where they opened on Monday. Germany’s DAX was trading at 9am around 6670, up 110 from Monday’s open. 

Elsewhere, the Argentinian government has caused a stir within the world trade community by expropriating a 51 % stake in the domestic oil producer YPF, which had been held by the Spanish energy giant Repsol. The move is thought to be the biggest of its kind since the Russian government’s seizure of the Yukos Oil Company a decade ago. However, the move had further ramifications for the president Christina Fernandez as it was unveiled on Wednesday that the nationalisation had scuppered years of planning by China’s Sinopec to buy the company. Mexico, Britain and the United States have all condemned Argentina and have warned it risks cutting itself off from world financial markets.

Sterling has had a strong week after it emerged from the Bank of England minutes on Wednesday that arch dove Adam Posen no longer supported a policy of quantitative easing. The news shocked markets which were already trying to digest news that inflation had been higher in March. Although the latter is normally thought to be worse for the domestic currency, news that there is likely to be no more gilt purchases from the bank sent Sterling to a near 6 month high, rallying from 1.5850 on Monday to a high of 1.6115 early Friday.

The main movers on UK equity markets were the mid cap oil stocks, particularly those focused on the Falkland islands as rumours floated around traders that Borders and Southern Petroleum had struck oil around the disputed provinces. Despite no confirmation from the company itself, shares in the AIM listed stock shot up 81% by Friday morning from its close on Tuesday. Rockhopper Exploration, Desire Petroleum and Falkland Island Oil and Gas all rallied off the back of the news.

Elsewhere, Supergroup shares fell 45% Friday morning as they issued a profits warning, India’s Tata pulled out of a bid to buy Cable and Wireless Worldwide, leaving Vodafone the only party left interested in the troubled telco and GDF Suez came in with an improved bid of 418p a share for the remaining 30% stake of FTSE 100 company International Power that they don’t already own.

The latter is likely to be a good deal for shareholders as it represents 16.2 times its expected 2012 earnings, well above the 9.9 multiple its utility peers have been recently trading at. Whilst a share offer of a 20.8% premium above pre bid speculation levels, surpasses the 19% average UBS reports to have been paid in utilities M&A since 2003. Timing is likely to have been the key ingredient for GDF’s apparent willingness to pay a higher price, as the uncertainty of the French election and the potential for left wing front runner Francois Hollande’s unfavourable policies, play on the mind of the 35% state owned French company.

 

Next week see’s the UK releasing public sector borrowing figures and preliminary GDP figures for the last quarter on Tuesday and Wednesday respectively, with the market’s likely to use these as a guide to how well the coalition government austerity plans are holding up at the start of the year. Across the pond, the US is also due to release advanced GDP figures on Friday which is expected to show continued strong performance in the first half of the year; Netflix; Amazon; Exxon; Pepsico; and Procter & Gamble are all reporting.

See our Economic Diary here.