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FTSE edges up as investors turn to tobacco

Imperial Tobacco leads the FTSE 100 higher as it looks to benefit from a merger of US rivals Reynolds and Lorillard. 

FTSE edges up as investors turn to tobacco

Tobacco stocks helped the FTSE 100 edge higher after a difficult week for the index.

The FTSE 100 gained 19 points, or 0.3%, at 6,692, but is on course to close around 3% down over the past five days.

Imperial Tobacco Group (IMT) was the biggest riser, jumping 81p, or 3%, to £27.40, as it announced it was in talks to acquire brands from US tobacco companies Reynolds (RAI.N) and Lorillard (LO.N), which are reportedly set to merge.

Analysts at Jefferies were sceptical about the need for Imperial to expand further into the US, but added that the group could potentially secure a good deal for the assets as Reynolds and Lorillard would be ‘forced sellers’.

‘IMT will no doubt argue that such a deal would transform its position in the USA and confer the scale in the market that is has historically lacked,’ said Jefferies.

‘But the assets likely to be on offer don’t feel hugely attractive to us. Ultimately, Imperial Tobacco would remain a distant number three player in the USA and one potentially under the cudgel of the Altria (MO.N) and Reynolds/Lorillard behemoths.’

British American Tobacco (BATS), which has a 42% stake in Reynolds, rose 36p, or 1%, to £35.56. Jefferies said the potential merger would be ‘benign’ for the company.

‘The further inference from media reports overnight is that BATS looks likely to do no more than support any deal to the tune of its current 42% holding in Reynolds,’ it said. ‘It implies a relatively immaterial £1.5 billion cash call and no reconsolidation of the USA and its attendant litigation risk.’

The financials sector was the best performer on the FTSE 100, up nearly 0.6%, mirroring a modest relief rally among European banks after troubles at Portugal’s Banco Espirito Santo (BES.LS) sparked heavy losses yesterday.

Portugal’s PSI 20 index rose 1.7% this morning, having fallen more than 4% yesterday, with financial stocks rising 2.9%. Espirito Santo’s shares were battered yesterday amid concerns about its parent company, which has delayed interest payments on some of its short-term debt securities. The shares remain suspended after the Portuguese stock market regulator intervened yesterday lunchtime, with the bank down 17%.

Friends Life (FLG.L) rose 2.8p to 323p after announcing the sale of Lombard, the insurer’s offshore wealth and tax planning arm, to asset management group Blackstone.

‘The announcement brings to an end what has been an exceptionally lengthy disposal process, and, as such, will likely be regarded as a small positive,’ said Matthew Preston, analyst at Berenberg.

‘That said, the £317 million consideration is significantly below the £400 million speculated (and less than the £412 million we have in our model).’

Unilever (ULVR) crept up 6p to £26.04 after selling its Slim-Fast brand to US private equity firm Kainos Capital.

Outside the FTSE 100, shares in ‘small cap’ stock Kofax (KFX) were hammered after the US software company revised down full-year revenue and earnings guidance. Shares fell 17.2% to 393.6p. ‘The news is disappointing as it comes so early on in the company’s Nasdaq life,’ said analysts at Panmure Gordon. ‘The company has done little to endear itself to UK investors by warning after the US close and having a conference call at 10pm.’

The Accumulator: banking worries resurface

Markets went into this week at record highs, with the Dow Jones having breached the 17,000 mark for the first time in its history, the S&P 500 not far off 2,000 and the FTSE 100 having recorded its biggest gain in nine weeks.

It's been a different story for the past few days. The troubles at Banco Espirito Santo have sparked concerns about a fresh banking crisis, and prompted a sell-off in European stocks as optimism that the eurozone had got through the worst of its problems began to wane.

'Yesterday's events in Portugal are a wake-up call to complacent investors who believed that Europe was starting to address its peripheral banking problems,' said Michael Hewson, chief market analyst at CMC Markets UK. 'While on its own events surrounding Espirito Santo could well be contained, the fact that these problems surrounding the solvency of peripheral banks have come at a time when the recovery in Europe shows signs of stalling is particularly concerning.'

Those worries have contributed to a bad week for European markets, as our exclusive Accumulator table shows. The MSCI Europe ex-UK index is down 3% in the week to yesterday, and the German Dax 30 fell by 3.2%. It's not just banking problems that have plagued Europe over the last week: a series of disappointing data releases has also served to depress investors.

In Germany, industrial output growth is flat-lining, while export and import growth is declining. Manufacturing production is falling in France and Italy, by 3% and 1.8% year-on-year respectively, while Spanish industrial output growth dropped from 4.3% to 2.5% between April and May.

The US had a better week, with losses on the S&P 500 limited to 0.8%, as investors took heart from Federal Reserve policy meeting minutes that showed the central bank isn’t in any hurry to raise interest rates.

Indian stocks were down sharply this week after a stellar run so far this year powered by the election of Narendra Modi. India’s new pro-business prime minister appeared to lose his golden touch with the markets as his first budget disappointed investors with a lack of detail on how the government plans to stock to its target of reducing the deficit. India’s CNX Nifty index fell 2.4%.

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