By Philip Stafford, FT Investor, FT.com site
Published: Jul 15, 2002

European markets tumbled to fresh five year lows by the close on Monday, with weakness in banks and oil stocks leading a decline which went deeper than the sharp falls also unfolding on Wall Street.

The pan-European FTSE Eurotop 100 was 5.8 per cent lower at 2,067.93 hitting fresh five-year lows. Markets weakened at the same time the dollar weakened against the euro, with the two currencies reaching parity for the first time in two years.

London’s FTSE 100 was down 5.4 per cent at 3,994.5 to its lowest point since December 1996. In Frankfurt, the Xetra Dax 30 fell 4.6 per cent to 3,939, its lowest close since December 1997. The Paris CAC 40 index erased earlier gains to stand down 5.2 per cent at 3,329.49.

On the new markets, the FTSE Techmark declined 4.4 per cent to 750.2 and the Nemax in Frankfurt was down 3.5 per cent at 512.66.

The dollar also hit parity with the euro, trading at €1.0069, driven in part by the same disillusionment with US equities which drove the sharp fall in global markets.

The selling was indiscriminate as every stock, bar two, on the three main indices ended lower. The lucky gainers were the German drugmaker Schering, up 1.6 per cent and BSkyB, up 0.4 per cent.

European exporters, whose output may now be assumed to be less competitive after the euro’s rise, were all lower. Carmakers BMW and Volkswagen were down 5.2 per cent and 5.7 per cent at €39.09 and €40 respectively. Chipmaker Infineon was down 1.2 per cent at €16.31.

US markets also turned weaker, with the Dow Jones Industrial Average down 3.1 per cent as most European markets were closing. The Nasdaq Composite was trading 1.5 per cent lower.

Hope in drugs fades

News of consolidation in the drugs sector bought little relief after Pfizer said it would buy Pharmacia in an all-stock deal valued at $60bn.

Investors will be hoping the deal will spark further consolidation in a sector under pressure from generic competition and a shortfall of new drugs coming onto the market this year. The deal will also make Pfizer the largest pharmaceutical company in Europe. Pharmacia shares were suspended on the Stockholm bourse.

“There’s a little bit of speculation that this will start another round of global consolidation and that investment bankers will be sharpening their pencils,” said Peter Cartwright, pharmaceutical analyst at Williams de Broe. “There is some evidence that the drug industry is following the model of market leaders becoming primarily marketing companies with many new products coming in the form of licensing agreements.”

The only stock to benefit, however was Schering which rose 1.6 per cent to €52.50.

Sanofi-Synthelabo lost 4.6 per cent to €53.25. And in London GlaxoSmithKline fell 4.1 per cent while AstraZeneca shed 5.5 per cent.

Banking stocks were weaker as investors continued to fret how the 6-week tumble in equity markets would affect 2002 earnings.

“Halfway through the year there are still scant signs of a recovery. Fixed income remains buoyant, but M&A and equities markets are still both weak. With volumes poor, market values falling and underlying margins still declining, it is difficult to see how revenues will pick up,” said analysts at Lehman Brothers.

Credit Suisse fell another 7.9 per cent at SFr37.15 while Societe Generale fell 5.8 per cent to €54.10. Commerzbank fell 5 per cent to €13.16.

Oil major Shell slid 8.1 per cent after The Financial Times reported concerns over the accounting treatment of its energy trading derivatives. George Naumur, a former general manager at Shell’s Houston operation alleges that he was told to come up with optimistic forecasts of future power and gas prices that would justify the derivatives deals. Shell insisted that the accounting treatment of the deals was “conservative”.

BP fell 8.5 per cent, while Royal Dutch was down 8.5 per cent to €45.58.

Deutsche Telekom fell 14.1 per cent to €10.43 after reports said the German government had put forward Gerd Tenzer, head of the company’s engineering group, as its preferred candidate to replace chief executive Ron Sommer. However, it said Mr Tenzer may struggle to win the majority backing of the board and may only serve as a caretaker chief executive. The company’s supervisory board meets on Tuesday to discuss Mr Sommer’s position.

Vivendi Universal was down 11.7 per cent to €15.15 after press reports that Guillaume Hannezo may quit as chief financial officer because of the revelations in early July that the company’s liquidity position was worse than thought.

By Vince Heaney, FT Investor, FT.com site
Published: Jul 15, 2002

London’s stocks renewed their slide in afternoon trade on Monday. The banking sector joined oils and drugs in the red and a mid-session recovery in telecoms proved short-lived.

Shell was under pressure on accounting concerns, while selected drug moved lower as investors worried about the prospect of further expensive acquisitions after Pfizer confirmed it was to buy rival Pharmacia in a $60bn all-stock deal.

The FTSE 100 traded 1.5 per cent weaker at 4,159.1 and the FTSE Techmark was 1.4 per cent weaker at 773.2.

In the currency exchange market the euro breached parity for the first time since February 2000, it stood at $1.0037 by 1500 GMT.

Troubled alternative network carrier Energis said it was in advanced talks that if concluded, would result in its business being sold to a company set up by its banks and bondholders.

If successful, a new body led by the banks and called Chelys, would take the UK operations of Energis private. It would inject new cash and is expected to agree a long-term moratorium of bank interest payments. The shares were 29 per cent lower at 0.84p.

Elsewhere in the telecoms sector mobile phone operator Vodafone fell 1.1 per cent and MM02 fell 4.8 per cent despite a broker upgrade. Incumbent BT Group traded 0.2 per cent weaker.

Oil major Shell traded 2.7 per cent lower after The Financial Times reported concerns over the accounting treatment of its energy trading derivatives. George Naumur, a former general manager at Shell’s Houston operation alleges that he was told to come up with optimistic forecasts of future power and gas prices that would justify the derivatives deals. Shell insisted that the accounting treatment of the deals was “conservative”.

Rival BP also dropped in morning trade, trading 3.6 per cent lower.

Centrica , the energy supply and home services group, which fell 5.7 per cent on Friday on rumours of financial irregularities, that it later denied, renewed its slide on Monday. The shares fell 4.1 per cent as accounting concerns remained prominent in investors’ minds.

The drug sector was in focus after newspaper reports that Pfizer has agreed to buy rival Pharmacia in an all-stock deal valued at $60bn.

The need for the major pharmaceutical companies to combat generic competition and launch new drugs could focus attention on the possibility of further sector consolidation in the wake of the Pfizer deal.

“There’s a little bit of speculation that this will start another round of global consolidation and that investment bankers will be sharpening their pencils,” said Peter Cartwright of Williams de Broe.

“There is some evidence that the drug industry is following the model of market leaders becoming primarily marketing companies with many new products coming in the form of licensing agreements,” Mr. Cartwright added.

UK drug heavyweights GlaxoSmithKline dropped 2.3, while Shire Pharmaceuticals fell 2 per cent, as investors considered the prospect of potentially expensive acquisitions. Bucking the trend, AstraZeneca recouped losses to gain 0.4 per cent.

After a choppy morning session financial stocks waned in afternoon trade. Barclays fell 2.5 per cent while Lloyds TSB fell 2.6 per cent and sector heavyweight HSBC Holdings erased early gains to trade 1 per cent lower.

Life assurer Aviva, formerly CGNU, added 0.5 per cent but Prudential edged 0.8 per cent lower and Legal & General fared worse down 1.5 per cent.

US markets are expected to open slightly firmer on Monday. Based on pre-market futures trading the Dow Jones Industrial Average is expected to gain 2 points and the Nasdaq Composite is seen adding 4 points.

Orchestream, the network management software group, slumped 35 per cent after it said it would adjust full-year 2001 sales downwards by £2.7m and that 2002 sales were expected to be £1.6m. The company said that it had £10m cash at June 30 and would cut quarterly costs by £1.1m to £3.1m by August 2002.

Property company Land Securities said it would return £541m of capital to shareholders. Investors are to receive 7 new shares and 8 B shares for every 8 current shares, in the capital return worth about 102p per share. The shares traded 0.9 per cent firmer.

Mothercare, the baby and children’s wear retailer, was 20.3 per cent lower after it reported a 3.1 per cent drop in UK like-for-like sales in the 14 weeks to July 12. The company said that first-quarter losses before tax would be larger than expected at £5.4m and that the rest of the first-half would continue to be loss-making. Chris Martin, CEO, will leave the company immediately.