Markets weak ahead of EU summit

EUROPEAN SHARES began the week with a bit of a tumble, as talks on a Greek debt swap deal rumbled on, Portuguese credit-default swaps rose to record levels and the publication of lacklustre US consumer spending data dragged stocks lower.

The spread between Portuguese and German 10-year-yields widened to euro-era highs, fuelling fears that Portugal may eventually follow Greece in restructuring its debt. Markets were weak across Europe as a result, as investors concluded that the euro zone debt crisis was far from resolved. One Dublin-based dealer described the day as “a pause for breath” after an upward swing in equities during January.

The euro also weakened in anticipation that the summit of political leaders in Brussels will fail to clarify the terms of Greece’s protracted second bailout, following fresh political tensions between Athens and Berlin over the weekend.

DUBLIN

THE STORY of the Iseq was the story of the airlines yesterday. Although it was Ryanair that produced third-quarter numbers described as “stellar” by analysts, it was Aer Lingus that wound up being the “star performer” of the session.

Investors responded positively to news that proposals have been floated at the Labour Relations Commission in relation to the funding of the €722 million pension deficit in joint scheme of Aer Lingus, the Dublin Airport Authority and the now defunct SR Technics, and the airline’s stock climbed 9.5 per cent to 85 cent as a result.

Resolving the pension difficulties is seen as a crucial step ahead of the Government’s sale of its 25 per cent interest in the airline, and analysts expect the airline to be the target of substantial corporate activity interest in the weeks and months ahead.

Ryanair secured third-quarter profits of €15 million and raised its full-year guidance to €480 million. After EasyJet’s results last week, the market had been expecting an “excellent” performance such as this, one Dublin-based dealer noted, and so much of the gain had been priced into the stock.

Comments by Ryanair’s chief financial officer Howard Millar that the airline is examining opportunities in Spain following the collapse of rival Spanair provided some fresh impetus, and the stock rallied at the close to finish up almost 1 per cent at €4.19.

Elsewhere, it was a quiet day in general for Irish stocks, although there was decent volume in drinks group CC, which fell 2.4 per cent to €3.14. The Iseq closed down 0.6 per cent overall.

LONDON

THE FTSE 100 index declined 1.1 per cent as weakness in the banks and commodity stocks dragged equities lower, extending falls recorded on Friday and further retreating from Thursday’s six-month closing high.

Rising aversion to risk among investors meant banks were the biggest blue-chip casualties, with financial stocks hit by concerns that extra liquidity injections from central banks have not addressed the sector’s fundamental problems.Analysts at Credit Suisse reduced their recommendation on the European banking sector to “underweight” as it said the direct earnings impact of the European Central Bank’s late-December splurge of cheap, long-term cash for the banks appeared to be over-estimated. Barclays was the UK sector’s biggest faller, down 4.2 per cent, while Lloyds Banking Group shed 4.1 per cent, and Royal Bank of Scotland fell 3.5 per cent.

Defensive stocks dominated on the short list of blue chip gainers, led by drugmakers, with AstraZeneca and GlaxoSmithKline up 0.6 per cent and 0.5 per cent.

EUROPE

AS THE focus on Greece clouded hopes of progress on future plans for fiscal integration, markets across Europe retreated, with Germany’s Dax closing down 1 per cent and the Cac in Paris declining 1.6 per cent.

The Stoxx Europe 600 Index slumped 1.1 per cent, as credit swaps implied a 72 per cent chance Portugal will default within five years.

BNP Paribas SA tumbled 7.1 per cent, leading French banks lower, as President Nicolas Sarkozy said he will unilaterally impose a financial-transaction tax. In the Netherlands, Royal Philips Electronics fell 2.2 per cent after reporting a larger-than-estimated loss. Germany’s Hochtief slid 5.8 per cent after saying it will post a wider annual loss than previously anticipated.

US

BY THE close of trading in Europe, the SP 500 and Dow Jones Industrial Average had sank 0.6 per cent, as concerns of the Greek debt crisis mounted and new data showed US consumer spending was flat in December, with households choosing to boost savings instead.

Eight out of 10 groups in the SP 500 declined as gauges of financial and energy companies decreased at least 1.1 per cent. Bank of America sank 3 per cent after Goldman Sachs Group cut its recommendation. – (Additional reporting: Bloomberg / Reuters.)