Investors turn more cautious as bond yields rise and Greek talks continueLeading shares are suffering sharp falls in early trading, as another sell off in the bond market spooks investors and Greece comes closer to running out of cash despite Monday’s Eurogroup meeting amid talk of a possible referendum.The FTSE 100 is currently 84.10 points lower at 6945.75, with the recent election rally and positive reaction to China’s latest interest rate cut seeming a long way off. The fall in bond prices - in Europe and overnight in the US - is doing some of the damage, with a number of reasons cited for the decline, including raised inflation expectations, an illiquid market and concerns the European Central Bank might end its bond buying programme early.A sell-off in US treasuries yesterday saw US stocks slip lower, as yields started to push higher again, the 10 year closing at its highest level this year.European bond markets also started to succumb to the same selling pressure that we saw in the middle of last week, with German bunds also coming under pressure again, on receding deflation concerns.Even in today’s depressed environment, we argue that an exit from iron ore might still offer the best value for Anglo American shareholders. Chinese interests would be the most likely acquirer, given that the production base would be of most value to them. In our view, the division presents a risk to the group if iron ore prices slip back. Many of the problems in the iron ore portfolio can be attributed to the previous management team, and an exit would refocus the investment case for Anglo American on precious metals and diamonds.Furthermore, we feel that the South African government might well be supportive of a deal, since it could help relations with the Chinese government and encourage further investment into the country.Seven factors support our upgrade: 1) earnings expectations have stabilised (our 2016 estimated earnings per share falls 4% on foreign exchange); 2) the UK outlook is improving (falling summer 2015 capacity; sterling strength; 4 years of rising package share of holidays yet volumes are still 16% below peak); 3) Nordic capacity risks have reduced (summer 2015 up 1.5% versus 12% in prior four years); 4) the fuel and foreign exchange cost outlook is the best for 10 years; 5) we estimate re-financing could add 8%-15% to 2017 estimated earnings per share; 6) the Fosun deal supports the product plans (more 100% controlled product) and means there is a known buyer for 5% of the shares; 7) we assume just £90m or 22% of Wave 2 profit targets land between 2015-2018 but this already helps support a 2014-2017 constant currency earnings before interest and tax growth of 14%. Continue reading...
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