European stocks fall back on UniCredit rights issue discount

The FTSE 100 reversed part of yesterday’s charge higher on Wednesday, with investors eager to lock in profits early in reaction to a weaker than expected trading update from high street retailer Next and a €7.5 billion rights issue from Italian bank UniCredit that was offered at a huge discount, heightening the expected weak demand and high desperation by banks to top up their capital at a time of weakening confidence amidst the eurozone sovereign debt crisis.

As the FTSE entered the closing stages of the trading day, the UK Index was trading lower by 36 points or 0.65%, performing slightly better than its European peers, with the DAX losing 1.1% and the CAC falling 1.6%.

A German 10-year bund auction progressed fairly well in the morning session, with a bid to cover ratio of 1.3, higher than the previous auction. Focus will now switch to the French bond auction tomorrow amidst uncertainty over the solidarity of the nation’s Triple A credit rating.

UniCredit’s rights issue discount smacks of desperation
Banking stocks were a key drag on the FTSE 100, with the UniCredit rights issue sending a bit of a tremour through financial stocks across Europe. The €7.5 billion issue was offered at a discount of 69% which is huge.

The size of the discount tells two distinct tales. Firstly that the Italian bank believes appetite to pick up the issue will be extremely weak, which echoes a lack of shareholder and investor confidence in the bank. And secondly, the fact that they are willing to offer such a large discount to some may smack of desperation. Either way, the read across from the offer itself has been one of surprise by most investors, who have moved to cash in yesterday’s gains in banking stocks early as a result.

UniCredit’s shares lost 14% on the day
Economic data out today in the form of eurozone inflation and US factory orders came in broadly in line with market forecasts. Eurozone inflation fell from 3% to 2.8%, in line with forecasts and perhaps freeing the hands of the ECB to cut interest rates even further. US factory orders rose by 1.8%, slightly above forecasts of 1.7%.

Next leads the FTSE fallers
Leading the downside in London trade were shares of Next, after the retailer disappointed somewhat with its trading update for the run up to Christmas. The retailer reported a rise in total sales of 3.1%, below the median of analyst forecasts for a 3.4% rise, whilst concern increased for many other UK high street retailers given the fact that Next high street store sales dropped 2.7%.

Despite the fall in high street sales, online directory business generated a 16.9% sales increase, emphasising the importance of online sales in the retail sector.

An important caveat on this update is the fact that weaker than expected like for like sales are being compared to a fairly poor run up to Christmas in 2010 after the dreadful weather conditions in the UK in November and December in 2010. This perhaps adds even more disappointment to today’s figures.

Next was also fairly bleak in its outlook, which weighed on the shares performance.