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By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — A months-long battle between Spain’s Telefonica and Portugal Telecom came to an end on Wednesday, with the two companies announcing they reached a €7.5 billion ($10 billion) deal over Brazilian mobile operator Vivo Participacoes.

In a statement to the Spanish regulatory authorities, Telefonica
/quotes/comstock/13*!tef/quotes/nls/tef
(TEF
66.47,
+0.42,
+0.64%)

/quotes/comstock/06x!ctef
(ES:TEF
16.99,
+0.10,
+0.59%)
said an agreement had been reached with Portugal Telecom to finally settle the question of who will end up with Portugal Telecom’s
/quotes/comstock/13*!pt/quotes/nls/pt
(PT
11.20,
+0.46,
+4.28%)
stake in Vivo
/quotes/comstock/13*!viv/quotes/nls/viv
(VIV
27.31,
+1.21,
+4.62%)
.

The deal was believed to have been made possible owing to a separate deal announced by Portugal Telecom simultaneously, in which it will take a 22.4% stake in Brazil’s Tele Norte Leste Participacoes
/quotes/comstock/13*!tne/quotes/nls/tne
(TNE
16.11,
-1.16,
-6.72%)
, known as Oi Telemar, for 8.4 billion Brazilian reais ($4.75 billion). The deal is likely to placate the Portuguese government which has objected to the telecom selling its stake in Vivo, a prized asset.

Shares of Portugal Telecom, which were suspended much of the day in Lisbon, reopened with a 4.4% gain as trading resumed.

Shares in Telefonica, which will reported second-quarter results on Thursday, gained 0.7%.

Telefonica and Portugal Telecom jointly own Vivo via investment vehicle Brasilcel, which owns 60% of the company.

Telefonica will pay for Vivo in stages: €4.5 billion at the closing of the transaction (within 60 days at the latest), another €1 billion on Dec. 31 and the remaining €2 billion by October 31, 2011.

Telefonica will also offer a tender offer for the ordinary shares of Vivo that aren’t held by Brasilcel, which represent 3.8% of Vivo’s equity, roughly estimated to be worth €800 million.

Telefonica said in a statement that the acquisition gives it “undisputed leadership” of Brazil’s telecom market, which has been key for the group since it entered there in 1999. It plans to combine Vivo with its Telesp unit in Brazil, making it the largest integrated operator by customer numbers (69.2 million as of March 2010), revenue and profitability.

For the group, its global businesses are particularly important right now, as its home country struggles with a deep recession, fueled by a collapse in the housing and construction market. Shares of Telefonica have lost 21% this year, largely by association with its troubled home market.

Rod Sleath, Jersey-based fund manager for Collins Stewart, said Telefonica has a 5% position in their Continental Europe Focus Fund. He said they’ve had the acquisition of Vivo modeled in for some time, and it didn’t present any change to their upside potential of the group.

“Over the medium term, the company should experience structural growth from its Latin American assets, while the business in Spain should be “relatively” non-cyclical (note though that we do budget in a contraction of earnings for Spain in our 2010 expectations),” he said in emailed comments. “In the meantime the business pays a high dividend yield and it is worth noting that approximately 50% of operating profits are generated outside of Spain.”

An Iberian battle, a final happy ending

Telefonica’s pursuit of Portugal Telecom’s Vivo stake last spring ended up drawing in both Portugal’s government and the European Union. Telefonica has raised its offer three times in pursuit of the Vivo stake.

Two weeks ago, Portugal Telecom let Telefonica’s €7.15 billion ($9.3 billion) offer for its stake expire, and the Spanish group refused to extend the offer period. However, analysts were saying it was only a matter of time before Portugal Telecom gave in.

Portugal Telecom and the government have resisted the sale on grounds that the Brazilian mobile operations are a key part of growth of the country’s largest telecom company. Last month, the Portuguese government used its golden shares in Portugal Telecom to block the sale of Portugal Telecom’s stake to Spain’s Telefonica, which was followed by a ruling from the European Court of Justice that Portugal’s actions were unlawful, constituting a restriction on the free movement of capital.

A deal for Oi Telemar

As for Portugal Telecom, a deal for Oi Telemar is expected to ease ruffled feathers among investors and the government. Oi Group is the leading provider of telecommunications services in the Brazilian market and the largest fixed telecoms operator in South America in terms of active clients. In 2009, the group reported revenues of over $15 billion.

Under the terms of the deal, Portugal Telecom will have a “relevant role” in the management of Telemar Participacoes and its subsidiaries and will be able to “proportionally consolidate” its stake in Telemar.

Earlier, Deutsche Bank analysts said a deal each for Portugal Telecom and Telefonica was the best way to avoid “the potentially value-destructive legal path for both parties.”

And a higher price tag for Portugal Telecom’s Vivo stake is likely to help the group pay down domestic debt and return cash to shareholders, they said in a note to investors.

For stocks of both Portugal Telecom and Telefonica, the analysts said it’s a win-win situation, with shares of the former rallying on potential gains in its dividend — either due to dividend flow from Oi or cash left on its books after the Vivo sale.

“Either way, Portugal Telecom should rally hard to levels €9.5…Telefonica too should rally on relief,” Deutsche Bank said.

Barbara Kollmeyer is an editor for MarketWatch in Madrid.

Telefonica finally gets its stake in Vivo

By Sarah Turner, MarketWatch

LONDON (MarketWatch) — British stocks fell Tuesday, with telecoms under pressure after a broker downgrade for Vodafone Group and a downbeat outlook from Cable & Wireless Worldwide.

Overall, the FTSE 100 index
/quotes/comstock/23i!i:ukx
(UK:UKX
5,139,
-8.82,
-0.17%)
declined 0.2%, or 8.82 points, to close at 5,139.46.

Shares of wireless giant Vodafone
/quotes/comstock/23s!a:vod
(UK:VOD
142.95,
-1.70,
-1.18%)

/quotes/comstock/15*!vod/quotes/nls/vod
(VOD
21.93,
-0.29,
-1.31%)
fell 1.2%, having

risen around 27% over the past 12 months.

ING lowered its rating on the firm to hold from buy on Tuesday. The broker said that Vodafone’s shares have seen the best performance among mega-caps in the past year and are near the top of a recent trading range.

At current levels, the broker said, Vodafone needs to deliver on its plans for value realization through some portfolio changes, adding that “we do not believe anything is imminent.”

Vodafone’s due to update investors on first-quarter trading on Friday.

“In aggregate, we do not expect the upcoming trading statement to be weak but have concerns about operational performance in Italy and Spain,” ING said.

Elsewhere in the sector, Cable & Wireless Worldwide
/quotes/comstock/23s!cw.
(UK:CW.
69.00,
-14.55,
-17.41%)
shares tumbled 17% after the company said that, in its fiscal first quarter, major programs and business lines performed broadly in line with plans but that noncontracted spending in the U.K. public sector has slowed very significantly.

“Given the nature of our public-sector business, this reduction will adversely impact trading in the current year,” the firm said. It’s now expecting growth in fiscal-year earnings before interest, tax, depreciation and amortization to be around the lower end of the range of expectations.

Elsewhere in the sector, BT Group
/quotes/comstock/23s!e:bt.a
(UK:BT.A
134.50,
-4.50,
-3.24%)

/quotes/comstock/13*!bt/quotes/nls/bt
(BT
20.50,
-0.77,
-3.62%)
shares fell 3.2%.

Data out Tuesday showed that borrowing by Britain’s public sector topped forecasts in June as growth in tax receipts slowed.
Read more on U.K. government borrowing.

Shares of bookmaker William Hill
/quotes/comstock/23s!a:wmh
(UK:WMH
174.60,
-4.30,
-2.40%)
declined 2.4% outside the FTSE 100.

Management said that revenue for the year to date is up around 3% while adjusted earnings before interest, tax and amortization are expected to be around 135 million pounds ($206.4 million), broadly flat compared to 134.6 million pounds a year earlier.

In its stores, operating profit fell 8% as poor horse-racing results offset strong World Cup business.

Spread-betting firm IG Group Holdings
/quotes/comstock/23s!e:igg
(UK:IGG
443.30,
-23.30,
-4.99%)
, which fell 5%, said fiscal-year net profit rose to 101.3 million pounds ($155 million), up from 78 million pounds in the year-ago period.

“The new financial year has started well, with the elevated volatility levels of May continuing into early June and helping to stimulate client activity. It remains difficult, however, to predict future trends in volatility or client reaction to changing market and economic conditions,” said CEO Tim Howkins.

Sarah Turner is a markets reporter for MarketWatch in London.

London Markets: British shares decline as telecoms weigh

By Steve Goldstein, MarketWatch

LONDON (MarketWatch) — Springtime in Europe reflected one of the most tumultuous economic periods in years, with Greece requiring international assistance to avoid default and with countries from powerhouse Germany to minnow Portugal unveiling austerity plans to calm bond-market vigilantes.

So as second-quarter earnings season on the Continent starts in earnest, it would be natural to assume that companies here will be reporting a difficult April-through-June experience.

It also would be wrong.

Second-quarter earnings per share for constituents of the Stoxx Europe 600 index
/quotes/comstock/22c!sxxp
(ST:SXXP
248.29,
-4.68,
-1.85%)
are projected to grow 26%, according to data from FactSet Research. That’s not so much lower than the 30% EPS growth rate seen for S&P 500
/quotes/comstock/21z!i1:inx
(SPX
1,072,
-24.05,
-2.19%)
constituents.

Sales growth also won’t be drastically different: 9% in Europe, 10% in the U.S.

Take Novartis, one of the first major European companies to report second-quarter results. The drugmaker said it was able to grow European sales by 8% even as governments across the region cut prices.
See Novartis story.

“It’s a classic case that the market is not the economy,” said Georgina Taylor, equity strategist at Britain’s Legal & General Investment Management.

“We have had concerns about fiscal issues, that’s about to be a drag on growth, but that hasn’t happened yet.”

Indeed, Novartis said the impact from European pricing will be felt more in the second half of the year.

Besides, European firms are hardly unprepared for tepid growth at home. The likes of BMW
/quotes/comstock/11e!fbmw
(DE:BMW
42.14,
-0.19,
-0.44%)
, which on Tuesday upped its earnings outlook, Siemens
/quotes/comstock/11e!fsie
(DE:SIE
74.20,
-0.88,
-1.17%)
, Alstom
/quotes/comstock/24s!e:alo
(FR:ALO
36.57,
-1.71,
-4.46%)
and Nokia
/quotes/comstock/22u!noki-sek
(FI:NOK1V
6.77,
-0.06,
-0.88%)
have become giants by selling overseas, not by focusing domestically.
See BMW story.

Alstom reports sales figures next Tuesday, Nokia reports earnings Thursday, Siemens releases quarterly results the following week and BMW’s full second-quarter results are due Aug. 3.

“You have very global companies, particularly the large caps that have sales outside the U.K. and the euro zone, and sell to the U.S. and also fast-growing areas like Asia,” said Nick Nelson, strategist at UBS.

In a research note, Citigroup analyst Adrian Cattley says the best lead indicator for European earnings growth over the last 20 years isn’t any European economic release — it’s the Institute for Supply Management’s U.S. manufacturing index.

“History shows a good fit between the two,” he said, which would imply a pretty good second-quarter earnings season in Europe.

Still, if the ISM/Europe earnings pattern holds up, it spells caution in future quarters because that gauge is beginning to decelerate.

But Cattley also found a close correction between Europe earnings and global GDP.

European Stocks to Watch: Second-quarter earnings may miss euro-zone pain

By Deborah Levine and William L. Watts, MarketWatch

NEW YORK (MarketWatch) — The dollar dropped about 1% against the Japanese yen and remained lower versus the euro on Friday, though the shared currency slipped after touching $1.30, as U.S. reports showed a drop in consumer sentiment and minimal inflation pressures.

The weak U.S. data meant that as equities fell — with the S&P 500 Index
/quotes/comstock/21z!i1:inx
(SPX
1,072,
-24.05,
-2.19%)
losing 1.9% — investors shifting out of riskier assets and into a safe haven were going into yen, pushing it to some of the best levels seen since November.

The dollar index
/quotes/comstock/11j!i:dxy0
(DXY
82.56,
+0.00,
+0.00%)
, which tracks the U.S. unit against a basket of six major currencies, slipped to 82.528 from 82.550 late Thursday. The index recovered after trading as low as 82.085.

Against Japan’s currency, the dollar
/quotes/comstock/21o!x:susdjpy
(CUR_USDYEN
86.3900,
-1.0300,
-1.1782%)
fell to ¥86.48 from ¥87.40 Thursday. The dollar fell as low as ¥86.24 intraday, not far from the low in November of ¥86.15. The all-time low in 1995 was around ¥81.
Read more on Japan, yen.

The euro
/quotes/comstock/21o!x:seurusd
(CUR_EURUSD
1.2921,
-0.0007,
-0.0541%)
rose just above $1.30 and recently traded at $1.2930 compared with $1.2906 in late North American trading on Thursday.

The British pound
/quotes/comstock/21o!x:sgbpusd
(CUR_GBPUSD
1.5287,
-0.0153,
-0.9909%)
extended losses to fall to $1.5314 from $1.5410 late Thursday. See MarketWatch’s currencies page.

The University of Michigan/Reuters index of consumer sentiment dropped in the early part of July by much more than analysts’ expected.
Read more about consumer sentiment.

The data supported U.S. bonds and pushed yields lower. That’s weighing on the dollar versus the yen, said Boris Schlossberg, director of currency research at GFT.
Read about Treasury bonds.

The dollar stayed down after a report showed U.S. consumer prices fell 0.1% in June, in line with analyst expectations. Core prices, excluding food and energy, rose slightly more than predicted but the year-over-year rate remains very low historically and points to a bigger risk of deflation — falling prices — than inflation.
Read about CPI report.

That removes one potential reason for the Federal Reserve to raise interest rates, which would support the dollar.

“The inflation data will raise more questions at the Fed about too-rapid disinflation [or deflation] risks,” economists at RDQ Economics wrote in emailed comments.

The policy-setting Federal Open Market Committee maintains an informal target of 1.5% to 2% for consumer inflation, they noted.

“Low actual inflation rates are one of the three factors the FOMC cites as warranting exceptionally low rates for an extended period, and there is nothing here to suggest a language change anytime soon,” they said.

The dollar also stayed down after the Treasury Department said international-capital inflows to U.S. debt in May slowed to $33 billion, primarily going into mortgage-agency bonds.

Net foreign purchases of U.S. long-term securities increased in May at the slowest pace since January, according to the Treasury International Capital, or TIC, report. Total holdings of equities, notes and bonds increased a net $35.4 billion in May, down from $81.5 billion in April. See more on TIC data.

Euro support

At the same time, the euro is benefiting from a number of factors, said Marco Annunziata, chief economist at UniCredit Group. The single currency has gained 2.3% this week against the dollar, and recovered about 5.8% so far this month.

The bounce marks a rebound from below $1.19 last month, which was a four-year low.

These include a “paradoxical” situation, Annunziata said. Despite the fact that the recovery in the U.S. is clearly more robust than in the euro zone, the Fed “sounds more dovish and seems to be toying with the idea of a renewed wave of quantitative easing, whereas the [European Central Bank] sounds cautiously more optimistic and short-term market rates have tentatively begun to edge up,” he said.

Earlier this week, minutes from the Fed’s June policy meeting indicated officials agreed to consider further policy measures to stimulate growth if needed.
Read about Fed minutes, dollar.

Investors also appear to be gaining confidence in the policy measures that individual euro-zone governments have undertaken to address the crisis and rein in deficits, while Asian investors appear more comfortable taking on sovereign-credit risk within the euro zone, he said.

The European banks stress tests due for publication next week, however, remain the “make-or-break challenge” for the euro, Annunziata said.

From last week, the dollar has lost 2.4% against the yen and 1.5% versus the British pound.

The dollar index is down 1.7% this week.

Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in London.

Currencies: Dollar drops versus yen as stocks fall after data

By Polya Lesova, MarketWatch

FRANKFURT (MarketWatch) — Relief over GlaxoSmithKline’s legal bills as well as upbeat J.P. Morgan Chase results helped turn London stocks higher on Thursday.

The U.K. FTSE 100 index
/quotes/comstock/23i!i:ukx
(UK:UKX
5,252,
-1.64,
-0.03%)
reversed early losses to trade 0.1%, or 3.9 points, higher to 5,257.22.

The index had started off in the red after China said Thursday that its second-quarter gross domestic product grew 10.3% over the same period a year earlier, slowing from the 11.9% annual growth recorded in the first quarter.
Read more on China.

The news from China, which is one of the world’s leading consumer of many commodities, weighed on the mining sector and other Chinese exposed firms.

Shares of Kazakhmys PLC
/quotes/comstock/23s!e:kaz
(UK:KAZ
1,058,
-13.00,
-1.21%)
fell 1.1%, and InterContinental Hotels
/quotes/comstock/23s!e:ihg
(UK:IHG
1,139,
-21.00,
-1.81%)
, which generated 19% of its first-quarter revenue from the Asia-Pacific region, slipped 2.1%.

Still, the J.P. Morgan earnings news helped lift banking giant HSBC Holdings
/quotes/comstock/23s!a:hsba
(UK:HSBA
641.20,
+1.50,
+0.23%)
, which rose 0.4%, though Barclays
/quotes/comstock/23s!a:barc
(UK:BARC
307.00,
-6.55,
-2.09%)
was stuck in negative territory with a 1.9% retreat.
See J.P. Morgan story.

GlaxoSmithKline
/quotes/comstock/23s!a:gsk
(UK:GSK
1,206,
+24.00,
+2.03%)

/quotes/comstock/13*!gsk/quotes/nls/gsk
(GSK
36.35,
+0.63,
+1.76%)
shares gained 2% as the drug giant revealed it was setting aside $2.4 billion to cover various legal bills, including settlements over Avandia, the diabetes drug that a U.S. panel recommended stay on the market late Wednesday.

“It is especially encouraging in light of the more pessimistic expectations ($6 billion) for Avandia legal damages,” said analyst at U.K. broker Killik & Co.
See full story.

Shares of energy giant BP PLC
/quotes/comstock/13*!bp/quotes/nls/bp
(BP
36.18,
-0.70,
-1.90%)

/quotes/comstock/23s!a:bp.
(UK:BP.
398.90,
-2.10,
-0.52%)
edged down 0.7%.

Traders digested news that the U.S. House committee on natural resources has agreed measures that would prevent BP from new offshore drilling for seven years.

Also, the firm received government approval to pressure-test the latest containment system on its blown Gulf of Mexico oil well.

Shares of Experian PLC
/quotes/comstock/23s!e:expn
(UK:EXPN
649.00,
+15.50,
+2.45%)
, the credit checking firm, gained 2.5% after the firm said that revenue for the three months to June 30 rose 9%.

Outside the FTSE 100, shares of Dimension Data Holdings PLC
/quotes/comstock/23s!a:ddt
(UK:DDT
121.70,
+20.10,
+19.78%)
rallied 20% to 122 pence. Nippon Telegraph and Telephone Corporation made an all-cash offer to buy Dimension Data for about £2.1 billion, or 120 pence a share.

Shares in Gartmore
/quotes/comstock/23s!e:grt
(UK:GRT
104.00,
-6.10,
-5.54%)
dropped 5.5% after the U.K. fund manager said late Wednesday that its former star manager Guillaume Rambourg has resigned in order to focus on concluding an investigation into his conduct by the Financial Services Authority.
See full story.

Polya Lesova is a reporter for MarketWatch, based in Frankfurt.

London Markets: Glaxo, HSBC nudge London stocks higher

By Claudia Assis and Kate Gibson, MarketWatch

SAN FRANCISCO (MarketWatch) — Crude-oil futures pared their losses on Wednesday after a government report showed a larger-than-expected decline in inventories.

Crude oil for August delivery declined 19 cents, or 0.2%, to $76.93 a barrel on the New York Mercantile Exchange.

The Energy Department’s Energy Information Administration on Wednesday reported a decline of 5.1 million barrels in crude inventories in the week ended July 9.

Analysts polled by Platts expected a drop of 2.6 million barrels.

The EIA also reported an increase of 1.6 million barrels for gasoline stocks and a rise of 2.9 million barrels for stocks of distillates, which include heating oil and diesel.

The analysts surveyed by Platts had projected increases of 950,000 barrels in gasoline supplies and 800,000 barrels in distillate supplies.

Refineries operated at 90.5% of their operable capacity last week, the EIA said. Analysts had forecast a drop by 0.4 of a percentage point to 89.4%.

On Tuesday, crude for August delivery rallied $2.20, or 2.9%, to $77.15 a barrel, closing above the $77-a-barrel level for the first time since June 28.

But the weaker retail sales figures took the bullish edge off the market, said Tim Evans, an analyst with Citigroup’s Citi Futures Perspective unit, in a note to clients. Also weighing on the market are prospects of an increase in supplies.

The Commerce Department reported Wednesday that sales at U.S. retailers dropped 0.5% in June, joining other evidence in recent weeks that has pointed to the economic recovery slowing down.

The American Petroleum Institute, a Washington-based trade group, on Tuesday reported that oil inventories had climbed 1.74 million barrels last week.

The front-month contract has traded between $70 and $80 a barrel since late May amid mixed economic reports and relatively few changes in overall supply and demand.

The dollar offered some support to crude and other commodities, with the dollar index
/quotes/comstock/11j!i:dxy0
(DXY
83.29,
-0.36,
-0.43%)
, which compares the U.S. unit to a basket of six currencies, off 0.3% at 83.32.

A weaker dollar usually bolsters commodities as it makes them less expensive to holders of other currencies.

U.S.-listed shares of BP PLC
/quotes/comstock/13*!bp/quotes/nls/bp
(BP
36.62,
-0.26,
-0.70%)
fell 1.9% after the oil giant announced further delays in an effort to stem the flow of crude in the Gulf.
Read more about BP’s efforts.

Claudia Assis is a San Francisco-based reporter for MarketWatch.
Kate Gibson is a reporter for MarketWatch, based in New York.

Futures Movers: Oil trims losses after supply report

By Sarah Turner, MarketWatch

LONDON (MarketWatch) — European shares posted mild losses on Monday as a bit of caution entered the market following last week’s gains, although deal speculation helped aerospace and defense group Zodiac and oil giant BP to gain ground.

The Stoxx Europe 600 index
/quotes/comstock/22c!sxxp
(ST:SXXP
250.05,
-0.04,
-0.02%)
traded down 0.3% at 249.37.

Last week, the index gained 5.4%, the best weekly performance in more than a yer, as economic data, central bank comments and some details on European bank stress tests buoyed sentiment toward stocks.

Banks and miners were behind much of last week’s gains but both sectors retreated on Monday, with Anglo American
/quotes/comstock/23s!e:aal
(UK:AAL
2,405,
-17.00,
-0.70%)
shares down 1.2% and Deutsche Bank
/quotes/comstock/11e!fdbk
(DE:DBK
48.99,
-0.39,
-0.79%)
shares down 1.2%.

Of the main regional benchmarks, the French CAC-40 index
/quotes/comstock/30t!i:px1
(FR:PX1
3,559,
+4.81,
+0.14%)
declined 0.2% to 3,547.30, the U.K. FTSE 100 index
/quotes/comstock/23i!i:ukx
(UK:UKX
5,150,
+16.75,
+0.33%)
traded flat at 5,133.17 and the German DAX index
/quotes/comstock/30p!dax
(DX:DAX
6,082,
+17.24,
+0.28%)
climbed 0.1% to 6,072.48.

Asian shares were mixed, while U.S. stock futures were pointing to a mild retreat on Monday with Dow Jones Industrial Average futures down 42 points.

Of companies in the spotlight, shares of BP
/quotes/comstock/23s!a:bp.
(UK:BP.
385.15,
+20.35,
+5.58%)

/quotes/comstock/13*!bp/quotes/nls/bp
(BP
34.05,
+0.31,
+0.92%)
jumped 5%.

The oil giant said that the installation of a new sealing cap that is intended to capture more of the leaking oil from its well in the Gulf of Mexico is proceeding as planned.

Also, the Sunday Times newspaper reported, without citing sources, that the oil major is in talks to sell up to $12 billion of assets to U.S. Apache Corp.
/quotes/comstock/13*!apa/quotes/nls/apa
(APA
87.88,
+0.48,
+0.55%)
, including a big stake in Alaska’s Prudhoe Bay. The same newspaper reported that Exxon Mobil
/quotes/comstock/13*!xom/quotes/nls/xom
(XOM
58.78,
-0.03,
-0.05%)
was mulling a takeover bid for the company.

Zodiac Aerospace
/quotes/comstock/24s!e:zc
(FR:ZC
41.26,
+1.48,
+3.71%)
shares climbed 2.9% to 40.95 euros.

The firm said over the weekend that it had received, and rejected, an approach from rival Safran
/quotes/comstock/24s!e:saf
(FR:SAF
21.95,
-0.39,
-1.72%)
, which fell 1.4%.

Safran said that it “acknowledges the reaction of Zodiac’s board while remaining convinced of the obvious logic from an industrial and a strategic perspective.”

Away from potential deals and German airport operator Fraport
/quotes/comstock/11e!ffra
(DE:FRA
37.35,
+0.66,
+1.79%)
rose 1.3% after it said that the total number of passengers at its five majority-owned airports in June rose 11.8% to 9.2 million, with cargo throughput up 27.5% from a year earlier.

“These numbers convincingly show that the finance and economic crisis has been overcome and that the aviation industry — despite several small traffic blips — is back on track to reaching and even exceeding the results of the pre-crisis years,” said CEO Stefan Schulte.

Sarah Turner is a markets reporter for MarketWatch in London.

Europe Markets: Europe stocks edge back; BP, Zodiac climb

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) — The U.S. stock market’s recent gains will be put to the test in the coming week as investors digest a torrent of major earnings and data, which may further mute hopes of economic recovery.

While second-quarter earnings are expected to increase at a decent pace, the tone of company outlooks is more likely to provide a telling direction for the market.

“Corporate guidance should be conservative in general because of lack of visibility,” said Sean Kraus, chief investment officer at CitizensTrust. “There’s going to have to be a re-tempering of expectations. People really did think we’d have a robust recovery.”

Late Monday, aluminum producer Alcoa Inc.
/quotes/comstock/13*!aa/quotes/nls/aa
(AA
10.94,
+0.22,
+2.05%)
kicks off the start to earnings season, followed later in the week by Intel Corp.
/quotes/comstock/15*!intc/quotes/nls/intc
(INTC
20.24,
+0.14,
+0.70%)
, Advanced Micro Devices Inc.
/quotes/comstock/13*!amd/quotes/nls/amd
(AMD
7.34,
-0.03,
-0.41%)
, Google Inc.
/quotes/comstock/15*!goog/quotes/nls/goog
(GOOG
467.49,
+10.93,
+2.39%)
, and General Electric Co.
/quotes/comstock/13*!ge/quotes/nls/ge
(GE
14.95,
+0.12,
+0.81%)
, along with a slew of banks including J.P. Morgan & Chase
/quotes/comstock/13*!jpm/quotes/nls/jpm
(JPM
38.85,
+0.69,
+1.81%)
, Citigroup Inc.
/quotes/comstock/13*!c/quotes/nls/c
(C
4.04,
+0.07,
+1.76%)
, and Bank of America Corp.
/quotes/comstock/13*!bac/quotes/nls/bac
(BAC
15.11,
+0.25,
+1.68%)
.

Coming off the first quarter, investors had fairly high expectations concerning the pace of economic recovery, Kraus said, but they may have to settle for a 2% economic growth rather than 3%.

“In the short-term, this summer, we need to be fairly cautious, and be very cautious this earnings season to take good news with a grain of salt,” Kraus said. “When you see bigger companies like Intel reporting we’re going to get a better view of what corporate America is seeing.”

Analysts polled by Thomson Reuters expect earnings for companies in the S&P 500 index
/quotes/comstock/21z!i1:inx
(SPX
1,078,
+7.71,
+0.72%)
to rise 27% compared to the same quarter last year, with materials, energy and technology stocks leading the charge.
Read full preview for second-quarter earnings.

Along with earnings, the week will see the release of data such as U.S. retail sales, the international trade balance, inventories, industrial production, the consumer price index, and consumer sentiment. See Economic Calendar.

U.S. stocks have rallied over the week shortened by Monday’s July 4 holiday, recouping much of the losses booked over the seven prior losing sessions. Volume over the past week was light, however, raising suspicions that gains could fall apart during earnings season.

“Over the holiday weekend, the market caught its breath after reports did not show signs of a double-dip recession,” said Channing Smith, co-manager of Capital Advisors Growth Fund.

“We’ll see if this light-volume week was the calm before the storm. Expect much more volume this week because of data. Next week, the market is going to be bombarded with data.”

New York Stock Exchange Composite volume on Friday was 3.6 billion shares, or about 70% of its 30-day average.

Fireworks after the Fourth

On Friday, the Dow
/quotes/comstock/10w!i:dji/delayed
(DJIA
10,198,
+59.04,
+0.58%)
rose 0.6% to close at 10,198, for a 5.3% gain on the week. The S&P 500 Index closed up 0.7% at 1078 for a weekly gain of 5.4%, and the Nasdaq Composite Index
/quotes/comstock/10y!i:comp
(COMP
2,196,
+21.05,
+0.97%)
advanced 1% to close at 2,196 for a gain of 5% for the week.

In an overly bearish and oversold market, Smith said any shred of good news was able to spark a rally in the past week. On Wednesday, bank stocks rallied when State Street Corp.
/quotes/comstock/13*!stt/quotes/nls/stt
(STT
37.21,
+0.83,
+2.28%)
issued a second-quarter outlook that was well above analysts’ estimates. Next week, investors will have to be more selective. Smith said the market can handle slower growth if outlooks over earnings season are more cautious.

One of the underperforming sectors this earnings season may end up being the financials sector, which has been buffeted by bank reform legislation. This quarter’s bank earnings may be muddied by comparison with last year’s accounting. Also, next week bank stocks may come under pressure if the U.S. Senate votes on passage of the Dodd-Frank bank reform bill.

“Banks are not going to have such good earnings because last year they reversed mark-to-market losses,” said Albert Meyer, Portfolio Manager of the Mirzam Capital Appreciation Fund. “Manufacturing, the rest of the sectors will report decent earnings to counteract that.”

Despite shaky consumer confidence, Meyer points to high CEO confidence and economic indicators as presaging a good, but not great, earnings season. “It’ll be strange if numbers come out low next week,” he said.

Wallace Witkowski is a MarketWatch news editor in San Francisco.

Market Snapshot: U.S. stocks to test gains in debut earning week

By Claudia Assis, MarketWatch

SAN FRANCISCO (MarketWatch) — Crude-oil futures trimmed some of their advance Thursday as traders peeked under the hood of an inventories report and didn’t quite like what they saw.

Crude for August delivery added $1.15, or 1.6%, to $75.24 a barrel, oil’s highest price in a week but a slight decline from earlier levels. Natural-gas futures turned lower after a separate report showed a larger-than-expected increase in stockpiles.

The Energy Information Administration reported a decline of 5 million barrels in the nation’s crude-oil inventories last week. The market expected the draw given a report from a trade group on Wednesday also showing a sizeable decline.

The EIA also reported an increase of 1.3 million barrels for gasoline stockpiles and an increase of 300,000 for distillates stocks.

While the decrease in crude stocks “was not a very big surprise,” markets reacted negatively to the increase for gasoline stocks and the smaller-than-expected decrease in crude oil stored in Cushing, Okla., the delivery point for Nymex oil, said Tariq Zahir, an analyst with Tyche Capital in New York.

“While the headline for crude is bullish … if you look more closely, the numbers for unleaded gasoline were bearish. We feel the unleaded gas markets numbers continues to show lackluster demand and will put pressure on the entire energy complex in the days to come,” he said in e-mailed comments.

Bill O’Neill, a principal with Logic Advisors in New Jersey, linked oil’s slight decline to a similar downward move for U.S. stocks. “It’s your typical trading turn,” he said. The EIA report was widely expected and oil markets were responding to an overall positive mood across most assets on Thursday, he said.

Optimism stemmed from a positive read on the job market and a boost for global growth expectations from the International Monetary Fund, as well as comments from the European Central Bank soothing fears about bank stress tests.

The Labor Department on Thursday said initial claims for jobless benefits fell 21,000 to 454,000 in the latest week. Economists surveyed by MarketWatch had expected initial claims to fall to 458,000.

The IMF raised its outlook on global economic growth to 4.5% from the previously reported 4.1%. The agency also boosted its forecast for U.S. growth to 3.3%, but warned of looming risk from Europe’s debt issues.

European Central Bank President Jean-Claude Trichet said results of stress tests are likely to be followed by action when needed. He emphasized the ECB is still providing unlimited liquidity for the financial system. The results of the stress test will be known July 23.

Meanwhile, reformulated gasoline for August delivery added 2 cents, or 1.2%, to $2.05 a gallon.

The American Petroleum Institute on Wednesday reported a decline of 7.3 million barrels in oil inventories on the week ended July 2.

Natural-gas futures for August delivery declined 17 cents, or 3.7%, to $4.39 per million British thermal units. A close around those levels will be natural gas’s lowest since June 1.

Earlier Thursday, the EIA showed a larger-than-expected increase in natural-gas stockpiles. The EIA reported an increase by 78 billion cubic feet for the week ended July 2, while analysts polled by Platts had expected an increase of 70 to 74 billion cubic feet.

That increase compares to 74 billion cubic feet reported in the same week last year, and a five-year average addition of 80 billion cubic feet.

Claudia Assis is a San Francisco-based reporter for MarketWatch.

Futures Movers: Oil pares gains as stocks trim advance

By William Spain, MarketWatch

CHICAGO (MarketWatch) — A mixed bag of gainers and losers characterized the trading in retail stocks Thursday as a raft of June sales data showed about half of the companies that reported receipts posting better-than-expected results while the rest came up short.

Hot weather helped some consumer buying patterns, as did a calendar shift in the timing of the Memorial Day holiday, but those factors were offset by disappointing economic news that has weighed on spending.

In all, the Thomson Reuters Same Store Sales Index registered a 3.1% comparable sales gain for June, slightly missing a final expectation of 3.2%.

This came even as the gauge posted its tenth consecutive positive showing, noted Thomson Reuters analyst Jharonne Martis.

“Seasonably warm weather, combined with the summer school break, increased mall traffic, benefiting teen retailers and department stores,” Martis wrote. “In addition, a good Memorial Day weekend boosted business, helping some June comps (at the expense of May), on the holiday’s shift to June this year.”

Among those companies missing their monthly growth forecasts was No. 2 U.S. discounter Target Corp.
/quotes/comstock/13*!tgt/quotes/nls/tgt
(TGT
49.67,
-0.76,
-1.51%)
, which reported an increase in same-store sales — those at outlets open at least a year — of 1.7%, short of the 2.7% gain expected by analysts polled by Thomson Reuters.

“Sales remained relatively soft for the second month,” said Gregg Steinhafel, chief executive, noting that demand for apparel, food, health care and beauty products was strong while sales of electronics, video games, music and movies were weaker.

Shares of Target slipped 1.4% to $49.72.

Meanwhile, shares of teen retailer Buckle Inc.
/quotes/comstock/13*!bke/quotes/nls/bke
(BKE
28.40,
-3.32,
-10.45%)
traded down 9% at $28.95 after it reported a 7.3% sales drop, though analysts were expecting an increase.

Also lower, Wet Seal
/quotes/comstock/15*!wtsl.a/quotes/nls/wtsla
(WTSLA
3.33,
-0.21,
-5.93%)
moved down 1% at $3.50 after it posted a deeper-than-expected sales decline of 3.6%, citing “inconsistent traffic patterns” and an “aggressive promotional environment.” The company added that it now expects second-quarter profit to come in at the low end of its previously forecast range.

A major gainer, shares of Abercrombie & Fitch
/quotes/comstock/13*!anf/quotes/nls/anf
(ANF
35.16,
+2.26,
+6.87%)
rallied nearly 8% to $35.49 as same-store sales jumped 9% — more than triple the 2.8% analyst average. Total sales for the five weeks ended July 3 increased 23% to $277.3 million.

Also on the bright side, J.C. Penney
/quotes/comstock/13*!jcp/quotes/nls/jcp
(JCP
23.09,
+1.31,
+6.01%)
bounced more than 6% to $23.15 after reporting same-store sales for June rose 4.5%, outpacing the forecast of 3.4% as compiled by Thomson Reuters. Total sales for the five weeks ended July 3 increased 3.7% to $1.55.

And Limited Brands Inc.
/quotes/comstock/13*!ltd/quotes/nls/ltd
(LTD
23.90,
+0.22,
+0.93%)
, the parent of the Victoria’s Secret chain, said same-store sales rose 6%, almost double the consensus expectation of a 3.2% boost.

William Spain is a MarketWatch staff writer in Chicago.

Retail Stocks: Retail stocks mixed after June sales