Summary of international Financial News

Wall Street retreats as bond yields rise
Financial Times
Monday January 29

NEW YORK - Wall Street languished on Monday, as a mix of quarterly earnings results and several deals were offset by a further rise in bond yields. Analysts said equity investors were in a defensive mood ahead of a two-day meeting of the Federal Reserve set to start on Tuesday. Investors are also awaiting inflation, manufacturing and employment data this week. Acquisition activity was led by banks as Merrill Lynch announced that it would buy First Republic Bank in a $1.8bn deal. Shares in First Republic surged 40 per cent to $53.63, while Merrill dipped 2.3 per cent to $92.39. Citigroup said it was buying Egg Banking from Prudential of the UK for $1.13bn. Shares in Citigroup fell 1.1 per cent to $54.06. Shares in Bank of America and Countrywide Financial were mixed as investors digested a Financial Times report on Friday that BofA and the nation’s largest mortgage lender were in talks about a possible merger. Shares in Countrywide rose 3.3 per cent to $43.38, after a rise of 4.2 per cent on Friday. BofA was 1.1 per cent lower at $51.46 late in New York.

Analysts at CreditSights said: “Even a joint venture as an initial step to a total buy-out makes sense since Bank of America needs to fill a $100bn gap in its balance sheet.” CreditSights said Countrywide’s $88bn of prime mortgage assets on its balance sheet could be funded “more economically” via “Bank of America’s cheap core deposit base”.

In the newsprint industry Abitibi-Consolidated and Bowater announced a merger. Shares in Bowater jumped 24 per cent to $27.44, and Abitibi rose 26 per cent to $3.33. Bristol-Myers Squibb rose 4.7 per cent to $27.43 amid buy-out talk for the drug company. By the close in New York, the S&P 500 was down 0.1 per cent at 1,420.62, while the Nasdaq Composite was up 0.2 per cent at 2,441.09. The Dow Jones Industrial Average rose 0.03 per cent to 12,490.78. Shares inIntel gained 1.8 per cent to $20.89. The chip-maker said it had succeeded in making smaller and more powerful microchips. Investors welcomed a 46 per cent jump in fiscal first-quarter profit at Tyson Foods, the meat producer. Its shares rose 3.5 per cent to $17.28 as earnings of 16 cents a share were well above estimates of 6 cents. Shares in Schering-Plough fell 1.1 per cent to $24.82, as its fourth-quarter net income jumped due to better sales of prescription pharmaceuticals and cholesterol drugs.

At this point in the earnings season, analysts have noted the relative lack of earnings that have surprised and surpassed expectations. Tobias Levkovich, chief US equity strategist at Citigroup, advised investors to “take advantage of current earnings misperceptions” and buy integrated energy and chip stocks, but maintain “some caution still on the banks and materials names”.


FTSE falls amid defensive shift
Financial Times
Monday January 29

LONDON - British American Tobacco was among the few talking points in a quiet London market on Monday. Its shares topped the FTSE 100 leaderboard, rising 2.8 per cent to a record high of £15.60. Traders said BAT was in focus ahead of results and demerger news from Altria, the parent company of Philip Morris, later this week. They added that in spite of its recent strong run, its shares still looked cheap compared to rivals such as Imperial Tobacco, up 0.8 per cent to £21.24, and Altadis. However, BAT was also buoyed by speculation that it could increase the amount of cash it returns to shareholders. In a recent note, Citigroup estimated that BAT could return £1.5bn to shareholders without a downgrade to its credit rating. At the moment, BAT is returning £500m a year. In order to do this BAT would need to increase its distributable reserves and amend a standstill agreement with its US partner Reynolds American. However, there are ways round both issues and analysts would not be surprised if the company were already working on a solution.
In the wider market, leading shares moved higher in low volume. The FTSE 100 came to rest 11.9 points, or 0.2 per cent, higher at 6,239.9, as strength in tobacco, aerospace and media stocks offset weakness in oils and utilities. Elsewhere, the FTSE 250 fell 13.9 points, or 0.1 per cent, to 11,104 - the first time it has underperformed the FTSE 100 since last Wednesday. Market turnover was poor, with less than 2.5bn shares changing hands. Traders said there was an increasingly jittery feel to the market, with institutions buying downside protection as the yield on the 10-year gilt rose above 5 per cent for the first time since late 2004.
On a brighter note, British Airways climbed 2.7 per cent to 542p on relief that a 48-hour strike by cabin crew members of its largest union had been averted.
In the media sector, WPP rose 0.8 per cent to 742½p after Merrill Lynch reiterated its “buy” rating and 810p target price. Merrill believes advertising agencies like WPP provide the best hedge against media fragmentation. Meanwhile, Yell Group, publisher of the Yellow Pages, added 1.5 per cent to 608p after a push from the same broker. “Yell is one of the few stocks in the media sector that offers good double-digit earnings growth, with a high degree of visibility, yet trades on a sub-sector valuation,” Merrill said.

On the downside, the miserable recent run of Drax Group continued, with shares in the operator of Europe’s biggest coal-fired power station falling a further 3.4 per cent to a three-year low of 675½p. Traders pinned the fall on wholesale gas prices, which for February delivery were trading at 24.85p-a-therm yesterday. According to analysts that means gas-fired power stations can produce electricity more cheaply than stations fuelled by coal. However, further downside in the Drax share price looks limited. At 650p its prospective dividend yield would be over 8.4 per cent and that should provide a powerful support.

British airways strike called off
Dpa
Monday January 29

LONDON - A strike by British Airways (BA) cabin crew scheduled for this week has been called off, the airline said Monday. More than 11,000 cabin crew had threatened to go on a two-day strike from Tuesday in protest against pay and conditions. BA had provisionally cancelled more than 1,300 flights from Heathrow and Gatwick airports in London. The announcement to call off the action followed two days of secret talks between BA management and the unions.

Worldwide tourist numbers hit record in 2006
AFP
Monday January 29

MADRID - The number of tourists worldwide rose 4.5 percent last year from 2005 to reach a record 842 million, with Africa showing the sharpest gain, the World Tourism Organisation reported Monday. It forecast an increase of 4.0 percent in tourist numbers in 2007, noting that the trend was now toward a decline in the pace of growth. Africa enjoyed an 8.0 percent rise in tourist numbers last year and was designated the "star performer" by the organisation. Following an unprecedented 1.2 percent decline in 2003, sparked by the war in Iraq, world tourism rebounded the following year with a 10 percent surge in the number of visitors.

China's steel output surges 18.5%
Business Report
Monday January 29

BEIJING - Crude steel output in China, the world's largest producer of the metal, surged 18.5 percent year on year to 418.8 million tons last year, Xinhua news agency reported yesterday. In spite of macroeconomic policies, the steel sector still expanded fast because of huge market demand, boosted by the booming economy, according to China's national development and reform commission.
It said that a large number of illegal and backyard steel firms had been set up since 2003 to cash in on the huge opportunities.

Blood Diamond rattles African gem trade
Dpa
Monday January 29

JOHANNESBURG - "Diamonds are forever," Shirley Bassey once sang, and the diamond industry wants it to stay that way. The potential threat now is the film Blood Diamond, which has revived controversy over so-called "conflict diamonds" used to fund civil wars in Africa. Fearing harm to their business - annual sales of nearly 10 billion euros (12.9 billion dollars) for rough diamonds and 14 billion euros for polished ones - the industry's public-relations and marketing specialists quickly manned their battle stations. Because the value of diamonds essentially depends on their image, Johannesburg-based De Beers, the world's leading diamond company, mounted an image campaign together with African partner governments to counter any taint to its reputation from the film. Sales of conflict diamonds have provided rebels and armies the money needed for weapons used in bloody civil wars, costing hundreds of thousands of lives, in countries such as Sierra Leone, Liberia, Angola and Congo. Two-thirds of all diamonds are produced in Africa.
Illegal diamond exports have also been used by terrorist groups for money-laundering purposes. The diamond industry responded to the problem several years ago. Diamond companies, governments, and non-governmental organizations, facing global pressure to end the smuggling of rough diamonds used to fund wars, met in 2000 in the diamond-mining town of Kimberley, South Africa, to devise an international diamond certification scheme. It was launched in 2003.
Called the Kimberley Process, the scheme has been endorsed by the United Nations and includes 71 participating countries as well as all major diamond mining, processing and trading centres. According to De Beers, the certification process covers about 99 per cent of all the diamonds produced. This year the European Union plans to plug the remaining hole, and to harness the diamond industry more tightly to measures aimed at preventing the sale of conflict stones. Since the end of civil wars in countries such as Angola and Liberia, the debate over conflict diamonds has become less intense.

Among the issues today is how diamonds can benefit the development of the countries producing them. Botswana and Namibia, for example, share profits with De Beers. Hundreds of thousands of people depend on diamond-mining for their livelihoods. The number in Nambia, where the first diamond was discovered nearly 100 years ago, is 5,000 workers and their families. The contract between Namibia's government and De Beers is currently up for renewal. In 2006, Botswana's government extended the licenses of De Beers' four diamond mines in the country - which account for more than half of the company's business - for another 25 years. In return, Botswana was able to increase its share of De Beers' stock from 7 to 15 per cent. In addition, De Beers agreed to help set up diamond-cutting operations and distribution centres in Botswana, so that precious stones from outside the country can also be prepared for the market. Botswana, which at 30 million carats annually is the world's biggest producer of diamonds by value, is trying to reduce its dependence on diamonds. To date, its diamond sales have accounted for about 70 per cent of its income. Formerly the British protectorate of Bechuanaland, Botswana produces a quarter of the world's diamonds and has been seen as a giant economic success story since the first precious stones were discovered there shortly after it gained independence. Botswana and De Beers have 50/50 stakes in the joint venture Debswana, the country's largest private employer.

Shoprite moves closer to partial relisting
Business Report
Monday January 29

CAPE TOWN - Shoprite Holdings could be allowed to do a partial relisting of 20 percent of the company on the JSE, despite falling short of a listing requirement.
Approval for the listing of a minority investment holding in the supermarket group is a key step to securing the buyout, following an upwardly revised offer by Brait Private Equity last week. According the JSE's listing requirements for investment entities, such entities require a portfolio of private equity investments, to spread the risk and protect shareholders. But in another document, the stock exchange mentions that under "exceptional circumstances" a listing requirement can be waived. Commenting on the principle of listing requirements, Andre Visser, the JSE general manager of corporate finance, said the bourse "considers the spread of portfolio risk, although it is not a prerequisite for a listing in terms of the requirements". Last year investment holding company Zeder Investments obtained permission to list its portfolio of holdings in private agriculture interests.
Visser added that other types of investment instruments, with different listing criteria, were also open to those wanting to list, such as debentures and preference shares. Last week the buyers upped the offer from R26 a share to R28 a share.
At the same time, Shoprite's biggest shareholder, Allan Gray, announced its support for the revised offer, conditional on approval for the partial listing that would allow fund managers to hold a minority interest in a delisted Shoprite. Generally, fund managers such as Allan Gray are not allowed to invest pension funds and unit trusts in unlisted companies. The support of Allan Gray, with an investment of 26.5 percent on behalf of clients, is an important step to securing the private equity deal.
The proposed listing may well be the biggest remaining hurdle to the deal - unless President Thabo Mbeki signs an amendment to the Companies Act, which is already approved by parliament, that will increase required shareholder approval from 50 percent plus one share to 75 percent. This is because even if the Securities Regulation Panel (SRP) rules that, as an interested party, Shoprite chairman Christo Wiese is not allowed to vote on the takeover, with Allan Gray's conditional support, Wiese and Brait will be that much closer to securing the deal.
If Wiese is not allowed to cast his 15.4 percent of ordinary shares, the pool of shares from which the votes will be counted will be smaller. Under this scenario, supporters of the deal, which include Allan Gray, Old Mutual and the Public Investment Corporation, will have 45.4 percent support. And if some small investors do not pitch for the vote, the buyers will be that much closer to the 50 percent mark. Karl Leinberger, the head of research at Coronation Fund Managers, confirmed that Coronation had not withdrawn its objection to the deal with the SRP because it was opposed to the principle of Wiese being allowed to vote.
Shoprite shares closed at R26.80 on Friday, down 3c. The food and retail sector lost 1.13 percent.

NYSE, Tokyo stock exhange to unveil alliance
AP
Monday January 29

NEW YORK - The New York Stock Exchange and Tokyo Stock Exchange are expected to announce an alliance as soon as Tuesday, which could be a first step to creating the first financial market with operations in North America, Europe and Asia. NYSE Group Inc. Chief Executive John Thain and Tokyo Stock Exchange President Taizo Nishimuro met in Paris on Sunday to discuss how the two exchanges can better cooperate. Nishimuro is scheduled to fly to New York Tuesday for a lunchtime speech before the Japan Society, and is expected to meet again with Thain Wednesday. Nishimuro brought up the idea of an alliance last year after NYSE Group announced it would acquire Paris-based stock exchange operator Euronext NV. "The CEO of the Tokyo Stock Exchange, when he heard about NYSE/Euronext, himself said that it was a great combination that would make a logical partner for them," Thain said in a November interview. "If you think about it, we'd have dollars, euros, and yen - the three main currencies of the world." The Tokyo market is in the process of demutualizing, much like the NYSE did before its own public listing in March, so any alliance could be considered an engagement of sorts until each is able to hold the other's shares. The NYSE on Jan. 10 announced it led a team of investors to buy a 20 percent stake in India's largest financial market, the Mumbai-based National Stock Exchange. The NYSE has said it intends to make similar deals around the world. "There's been a big build up about the possibility of a deal, and if something big doesn't come of it, this will all be very anticlimactic," said Octavio Marenzi, chief executive of financial consulting firm Celent. Most likely the alliance will be a broader memorandum of understanding between the two sides to cooperate more closely on technology and listings, he said. There is also a possibility the TSE might sell the NYSE a small stake in the privately-held exchange. "There's not much interest in going public for the TSE because they like having control over the exchange and market structure," Marenzi said. "Just saying they might merge somewhere down the line isn't enough. Engagements are broken off all the time." Thain and Nishimuro, while attending the World Economic Forum in Davos, Switzerland last week, confirmed last week that both sides were in the final phase of talks. Any alliance could not come at a better time as stock, commodity, and futures exchanges are in the midst of a mass consolidation. For the NYSE, a deal would solidify plans to go global and outpace Nasdaq Stock Market Inc., which is in the midst of a hostile takeover bid for the London Stock Exchange. Nasdaq has said a deal in Asia remains a strong option.
Thain could also be hoping to lure Japanese companies to list on the NYSE. Mizuho Financial Group Inc., Japan's second-largest bank by assets, which began trading last year on the NYSE was the 19th listing on the NYSE from Japan. It is the third-largest listing from Japan, with a market value of $92 billion (¤71.2 billion).
Tokyo, with pressure from rival exchanges in Hong Kong and Singapore, needs to maintain its edge as the world's second largest financial market after the NYSE. An agreement would indicate the TSE won't be left behind as rivals pair off.

Such an alliance might also help the TSE regain some luster following criticism last year after its trading system temporarily shut down on Jan. 18. The exchange closed early that day after massive trading volume, sparked by a prosecutor's raid on Japanese Internet service provider Livedoor Co., threatened to overload its computer system.

The Tokyo Exchange, formed in 1878, lists about 2,300 companies, and has a total market value of more than $4 trillion (¤3.1 trillion). The TSE trading floor was closed in 1999 as it switched to electronic trading. NYSE completed its roll out of electronic trading last week, but still plans to maintain floor traders.

China set to surpass Spain as tourist destination: UNWTO
AFP
Monday January 29

MADRID - China could surpass Spain as the world's second most popular tourist destination by 2010, and draw level with France by 2020, the United Nations World Tourism Organisation said Monday. The Madrid-based UN body released preliminary 2006 figures which showed that visits to China were up an annual six percent at 49.6 million, and despite an appreciating yuan. Spanish arrivals rose 4.5 percent to 58.4 million but Chinese growth is forecast to accelerate and ultimately overtake the Spanish in the coming four years, according to UNWTO head Francesco Frangialli and John Kester, director of market intelligence and promotion. "A country as big as China has more tourist capacity. China is generating a flux of tourism in the region," said Kester, while Frangialli forecast that China "could surpass Spain by 2010." Frangialli said China, with its "great tourist capacity," was also on track to surpass France, the world's most popular tourist destination, by 2020. Figures for France were not immediately available but were expected to be almost unchanged on 75.9 million for 2006. The Chinese are also doing their bit for the sector by visiting, as well as being visited. A report from the UNWTO last year estimated Chinese tourists visiting foreign destinations would number 100 million by 2020, having already risen from 20 million in 2003 to 31 million by 2005.

Chinese tourist spending abroad rose 14 percent in 2005 to 21.8 billion dollars (17 billion euros) compared with 2004 and provisional figures showed another 16 percent rise last year. "China is consolidating its status as Asia's largest outbound tourism market as 34.5 million Chinese travelled abroad in 2006," for an 11 percent rise on 2005, the UNWTO said, quoting the Ministry of Public Security.