LONDON MARKET CLOSE: Stocks Rebound; RSA Surges On Zurich's Interest

LONDON (Alliance News) - UK shares ended higher Tuesday, together with other major European equities markets, while the pound strengthened against the dollar following a reassuring reading of second quarter UK GDP.

On the corporate front, RSA Insurance shares surged after Switzerland's Zurich Insurance confirmed it is evaluating a potential offer for the FTSE 100 company. At the other end of the table, Royal Mail led the blue-chip losers after UK regulator Ofcom said its provisional view is that the postal company breached competition law in its wholesale pricing to competitors.

The FTSE 100 closed up 0.8% at 6,555.28, taking back about half of Monday's losses. The FTSE 250 ended up 0.7% at 17,387.89, and the AIM All-Share index finished up 0.2% at 749.16.

European major indices also improved, with the CAC 40 in Paris adding 1.0% and the DAX 30 in Frankfurt climbing 1.1%.

The pound rose sharply against other major currencies following UK GDP data, which came in as expected, coming off session lows of USD1.5526 against the dollar.

The UK economy expanded at a faster pace in the second quarter, largely driven by an improvement in services output, a preliminary estimate from the Office for National Statistics showed. Gross domestic product grew 0.7% quarter-on-quarter, in line with forecasts, following a 0.4% rise in the first quarter.

Services expanded 0.7% and production increased 1%. Construction growth came in flat, and agriculture contracted 0.7%. UK GDP was 2.6% higher in the second quarter compared with the same quarter a year ago. The annual growth figure also matched expectations.

After the UK GDP release, better-than-expected readings from the US Markit services and composite purchasing managers' indices weren't enough to pull the dollar back up against the pound. Sterling remained higher against the greenback after subsequent disappointing US consumer confidence data.

Confidence among US consumers saw a substantial deterioration in the month of July, according to a report released by the US Conference Board. The US Conference Board said its consumer confidence index tumbled to 90.9 in July from a downwardly revised 99.8 in June. Economists had expected the index to show a much more modest decrease to a reading of 99.6 from the 101.4 originally reported for the previous month.

Markit services PMI came in at 55.2 for the US, slightly above economist expectations for a 55.0 reading, and also above the 54.8 reading seen in June. The composite index also read 55.2, ahead of the 54.6 level a month ago.

At the European stock markets close, the pound was trading at USD1.5597, slightly up from USD1.5577 at Monday's equities close in London.

The US Federal Open Market Committee begins on Tuesday its two-day meeting ahead of its interest rate announcement on Wednesday at 1900 BST.

The Fed is widely expected to leave US interest rates unchanged at the meeting. However, investors will pay attention to the accompanying monetary policy statement, after a recent hawkish speech and Congressional testimony by Fed Chair Janet Yellen intensified expectations that the bank would hike rates later this year.

Many analysts still expect the Fed to raise US interest rates at its next meeting in September and will be closely scrutinizing the statement for any hints about the timing of the first US rate hike in nine years.

At the European equity markets close, Wall Street was higher, with the Dow 30 up 0.6%, the S&P 500 up 0.7%, and the Nasdaq Composite up 0.4%. In a busy day in the US earnings calendar, online social networking service Twitter, biotechnology company Gilead Sciences, and online business review site Yelp are yet expected to release updates after the New York market close.

On the London Stock Exchange, RSA Insurance was the best performer in the FTSE 100, up 16%, after Zurich Insurance said it is evaluating a potential bid for RSA. After the Swiss insurer's announcement early Tuesday, RSA said it has not held talks or received any offer from its European peer. Zurich had said its announcement does not represent a firm offer to buy RSA and said there is no assurance that any offer will be made.

Following Zurich's statement, Shore Capital upgraded its rating on RSA Insurance Group to Buy from Hold. Shore analyst Eamonn Flanagan said that despite the group's recent problems there are some "terrific assets" in RSA which would be attractive to potential buyers. In addition, following the rights issue and disposals, the analyst said the group is pretty well capitalised.

Hikma Pharmaceuticals ended up 12% at 2,327.80 pence, after it said it has agreed a USD2.65 billion deal to acquire Roxane Laboratories and Boehringer Ingelheim Roxane from Boehringer Ingelheim, the German pharmaceutical company. Under the terms of the deal, Hikma will issue 40 million shares to Boehringer at 2,350 pence per share, along with a USD1.18 billion cash payment. This will give Boehringer an around 16.71% interest in the company.

Hikma said that Boehringer's investment in Hikma's shares at a premium reflected Boehringer's confidence in the value creation potential for them as long-term shareholders.

GKN closed up 6.5%. The engineer said it has agreed a EUR706 million deal to acquire Netherlands-based Fokker Technologies Group, while reporting a fall in pretax profit for the first half of 2015 thanks to weakness in some of its key end markets. GKN said it will pay EUR706 million to acquire Fokker Technologies, a Dutch maker of aerostructures, electrical wiring systems, landing gear and associated services. GKN said the deal will strengthen its position in the aerospace market and will expand its presence in the Chinese, Turkish, Indian and Mexican markets.

News of the acquisition eclipsed any concerns about GKN's first-half results. GKN's pretax profit for the six months to the end of June was down to GBP212 million from GBP224 million a year earlier, despite an increase in sales for the group to GBP3.62 billion from GBP3.57 billion.

Meanwhile, Royal Mail ended down 3.4% after UK media and communications regulator Ofcom said it has issued a statement of objections to the postal service operator, with a provisional view that the company breached competition law by discriminating in its wholesale pricing against postal operators that competed with it on delivery.

Ofcom said its provisional findings, part of the investigation launched following a complaint by Whistl, a former competitor of Royal Mail, are that Royal Mail's changes to prices, terms and conditions for the provision of access services included "unlawful price discrimination".

In response, Royal Mail said it was "disappointed" by the regulator's announcement and added it takes its compliance obligations "very seriously".

In the FTSE 250, Melrose Industries closed up 9.7% after it said it sold its Elster business to US industrial conglomerate Honeywell International for GBP3.3 billion in cash. It said that in addition to the cash consideration, Honeywell will assume the majority of the pension schemes on Melrose's books.

Melrose is planning to use the consideration for the Elster businesses to return more than GBP2 billion to its shareholders and for general corporate purposes, including paying down its debt obligations.

In a very busy corporate calendar Wednesday, among others, Sky releases full-year results and Barclays, Capita, Taylor Wimpey, St James's Place and British American Tobacco publish half-year results. Antofagasta issues a second-quarter production report, while Compass Group and Brewin Dolphin release interim management statements. GlaxoSmithKline releases its second-quarter results at 1200 BST.

In the economic calendar, the German Gfk consumer confidence survey is due at 0700 BST, while UK consumer credit and mortgage approvals data are due at 0930 BST. In the US, pending home sales are due at 1500 BST, while EIA Crude Oil stocks are at 1530 BST.

By Daniel Ruiz; danielruiz@alliancenews.com

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