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Money Marketing Markets: ‘Oil and takeover talk greases the market’s wheels’

Given the extreme volatility witnessed since the start of the year, the past week must have come as something of a relief for many investors.

The FTSE 100 had moved by less than five points over the first four days of the week going into Friday’s trading session.

By midday, the blue chip index looks set to end the week with a flourish, up 63 points or 1 per cent, to 6,149, following on from strong gains in the US and Asia overnight.

Big oil had a big week with bumper results from BP, Royal Dutch Shell and BG.
BP revealed profits were up 48 per cent to £6.59bn in the first quarter, while Shell saw profits grow by 12 per cent to £7.78bn.

Both comfortably beat analysts’ expectations. BP pointed out around £1bn of this was down to unusual circumstances, including better than expected trading profits, but even without this the firm would still have beaten the market’s forecast of £5.2bn.

“The surprise here is that what integrated oil companies gain on the high oil price they tend to lose elsewhere,” says Graham Ashby, manager of the Credit Suisse income fund. “Their margins can be squeezed by the higher oil costs impacting other parts of the business which consume a lot of oil, such as refining and distribution.”

The pair soared by 6 per cent on Tuesday’s announcements, although motorists were unlikely to be the leading the celebrations.

BG actually slid 77p to 1,231p on the day, despite unveiling first quarter profits of £1.35bn, a 73 per cent hike on the same period last year.

“BG has been a key beneficiary of high oil prices for a long-time, so the strength of the results was not necessarily a big surprise although it smashed forecasts. The big surprise was that it is bidding for Origin Energy and the market is concerned that it might get dragged into a bidding war,” Ashby says.

The UK’s number three oil company is launching a £6.1bn raid for Origin, Australia’s second biggest electricity and gas supplier.

Takeover talk abounded elsewhere in the market on Friday, particularly among the miners and financials.

Rio Tinto was a gainer after its chairman said the firm is mulling a break-up of the business. This alerted BHP Billiton, whose $147bn offer in February was rejected, with both up 1 per cent on the news. Meanwhile, Xstrata climbed by a similar amount amid speculation it will snap up Aussie firm Macarthur Coal.

Financials also gained on takeover speculation after Allianz said it wants to expand its UK presence. Royal & Sun Alliance and Old Mutual gained close to 3 per cent on the news.

But, Royal Bank of Scotland was the biggest winner, up 6 per cent on talk of interest in its insurance portfolio, which includes Churchill and Direct Line, from private equity firm Texas Pacific Group.

“There is a track record of overseas companies coming into the UK market, but it is tough because it is so competitive,” Ashby warns.

Tough continues to be the watchword of many of the leading retailers. Home Retail Group, owner of Argos and Homebase, said weak consumer confidence and poor weather were hitting sales, although it still beat expectations.

The supermarkets had a difficult week following on from the OFT’s latest investigation but there are still rays of light in the sector. Ashby points to some of the second liners, including catalogue firm N Brown, which saw a 19 per cent profit jump, while Game and Dunelm also delivered solid results.

“We are seeing very mixed data from the retailers,” he says. “It is tough out there but the companies with a niche market position appear to be holding up better.”

John Lewis’ positive message also sparked a mini-rally on Friday but Ashby warns stockpickers need to be selective.

The same can be said of the banks. HBOS’s £4bn cash call on Tuesday arguably surprised few, despite its management having ruled it out previously.

Its share price drifted marginally on the news but the fact they were not hammered on the day reflects the amount of bad news already factored into the price, Ashby says.

Axa Investment Managers senior strategist Chris Iggo notes that the Bank of England said this week that it believes the worst of the credit crunch is over.

“Interestingly, in its Financial Stability Review, the Bank of England said that the value of losses related to sub-prime and other assets is likely to turn out to be much less than the amount that has been written off by banks,” he says.

“If this is the case then bank balance sheets should look healthier and market spreads should be able to return to some kind of normality.”

How quickly this will filter down to the consumer, in terms of mortgage repayments, remains to be seen but for many segments of the market this cannot happen soon enough.

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