MARKET COMMENT: RBS And IHG Surge While AstraZeneca Falters

LONDON (Alliance News) - UK stocks are trading marginally higher Friday, with a strong update from Royal Bank of Scotland and continued merger talk in the pharmaceutical sector trumping concerns over a deteriorating situation in Ukraine.

Markets as a whole remain relatively subdued ahead of the monthly US jobs report still to come.

By mid-morning Friday, the FTSE 100 is fractionally higher at 6,811.27, the FTSE 250 is up 0.5% at 15,930.73, and the AIM All-share is fractionally higher at 824.66.

RBS has led the blue chip gainers for most of the morning after reporting that its profits doubled in the first quarter compared to the previous year. In a statement, RBS said first-quarter pretax profit increased to GBP1.64 billion from GBP826.0 million in the corresponding quarter a year earlier, even as total income decreased to GBP5.05 billion from GBP5.16 billion.

The stock has jumped 6.6% to the near the top of the FTSE 100 on the better-than-expected numbers, which analysts say delivered a positive surprise across a number of key metrics, including the capital ratio, the outlook for interest margins, and the run down of the internal bad bank.

The strong update follows better-than-expected numbers from Lloyds on Thursday and boosts the banks in general for the second consecutive day, with the FTSE 350 sector up 0.3%.

The pharmaceutical sector is performing less well amid the continued sparring between Pfizer and AstraZeneca. Pfizer on Friday confirmed that it increased its bid for AstraZeneca to GBP50 per share from the original offer of GBP46.61 per share. The US company also sent a letter to UK Prime Minister David Cameron, making promises such as to keep its European head office and 20% of its R&D staff in the UK, if the government doesn't block the deal.

AstraZeneca responded by asking shareholders to take no action, saying that the board will meet and make an announcement "when appropriate".

Meanwhile, calls are growing from officials and commentators for increased regulatory inspection, given the potential for the loss of both UK jobs and medical know-how. "The recent bid by US drugs giant Pfizer for AstraZeneca has raised concerns about job losses being implemented on one of the UK?s largest and most successful companies," said CMC Markets chief market analyst Michael Hewson.

The fact that Pfizer is concerned enough about potential regulatory intervention to write directly to the Prime Minister appears to have investors worried, and AstraZeneca is down 0.8% as a result, currently trading more than GBP2.20 below Pfizer's offer price.

"When Cadbury was taken over a few years ago, Kraft CEO Irene Rosenfeld went to great lengths to promise to keep open a UK factory only to develop selective amnesia and subsequently close it once the deal has gone through," points out CMC's Hewson.

The pound took a brief knock against the dollar to a session low of USD1.6870 on release of the latest construction PMI that came in light of expectations. The UK construction sector PMI slowed to 60.8 in April from 62.5 in March, a faster slowdown in growth than the reading of 62.0 that had been expected by economists. Although, with a PMI reading above 50.0 indicating expansion, the sector remains buoyant.

"We will have to wait for next week?s dominant services PMI before getting the full picture on the economy. But combined with yesterday?s very strong manufacturing PMI today?s figures signal continued rapid growth in the UK economy," said Berenberg Chief Economist Rob Wood.

A round of European Markit manufacturing PMI's has broadly confirmed the expected trend of slowly improving growth across the region. The Italian and French numbers both came in slightly higher than expected, while German was slightly behind expectations, but all regions recorded expansion. The eurozone wide print came in at 53.4 in April, up from 53.0 in March, and slightly ahead of the 53.3 expected by economists.

Eurozone unemployment ticked down to 11.8% in March, from an initial reading of 11.9% in February, although February's number was also revised down to 11.8% Friday. While still an extremely high level of unemployment, the slightly improved reading adds to the picture of a very slowly improving economic situation across the single-currency block.

The death toll from clashes in Ukraine continues to tick higher, with reports of three more killed and several injured in the eastern city of Sloviansk on Friday. The Ukraininan Defence Ministry said that two crew members were killed and an unspecified number of soldiers were injured after separatists shot down two Mi-24 assault helicopters with surface-to-air missiles. While the situation clearly continues to deteriorate, the issue remains on the back burner for markets.

Elsewhere among UK stock movers, Intercontinental Hotel Group is having a very strong day, up 8.7% and topping the FTSE 100 after announcing a bigger-than-expected special dividend. The group will return a total a total of USD750 million to shareholders, which is larger than the market expected, said Jefferies analyst Ian Rennardson. The group has also announced a strategic review for asset disposals, which Shore Capital analyst Greg Johnson expects to lead to an extension of the buyback programme when the current USD500 million is completed in the second quarter.

Housebuilders are also performing strongly Friday, with Redrow up 5.9% and leading the FTSE 250 gainers after reportedly being upgraded to Buy by analysts at Citigroup. Berkeley Group and Taylor Wimpey are also each up 3.5%. FTSE 100 listed housebuilder Barratt Developments is up 1.6%.

Still to come Friday, the US non-farm payroll report is set for 1230 GMT. The consensus expectation is for a strong print of 210,000 jobs added in April, and for the US unemployment rate to tick down to 6.6% from 6.7%. "Even though the unemployment rate is no longer directly used in the Fed?s forward guidance, this will still be of interest," said Lloyds Bank senior international macroeconomist Rhys Herbert.

The New York ISM index is also due at 1345 GMT, followed by US factory orders at 1400 GMT, which are expected to have expanded at 1.5% month-on-month in March. US futures are currently indicating a marginally higher open on Wall Street.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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