Market Report: Banks pay as investors cash in blue chip gains

Some of the biggest single share sales were in the banking sector. Morgan Stanley is believed to have sold 12 million Lloyds TSB shares at 474.5p and 5 million of Royal Bank of Scotland at 1,611p on behalf of a single institutional client. Hence it was no surprise to see Lloyds close 5.75p lower at 474.5p and RBOS drop 16p to 1,612p. The US broker was also reported to have handled the disposal of 22 million shares in Marks & Spencer, again on behalf of an institutional investor, at 348.5p. The high-street retailer finished the day at 348p, down 5.5p.

So why the sudden retreat from the equity market? As ever, the answer depends on who you ask. Many traditional analysts cited investor worry that the recent strength in the price of oil will soon cause the economies of the US and Europe to slow down. In turn, such a scenario will almost inevitably hit corporate earnings. Credit Suisse First Boston estimates that every $10 (£5.50) rise in the value of crude takes 2.5 per cent off US earnings growth.

Yesterday also saw the FTSE 100 fail to break through its previous high for the year of 5,386. To technical analysts, those who look at historic trends in stocks and indices, and use them to predict the future, this is a significant development. They call it a "double top", meaning that the market has twice attempted to set a new high and failed, and predict that a period of falling prices is likely to follow as sellers take control.

Angus Campbell, the head of sales at the spread-betting firm Finspreads, points out that the last time the FTSE 100 formed a similar double-top trend was at the end of April last year, when the index twice failed to set new highs above 4,600. This was followed by a period of weakness and it took the index until the end of September 2004 to break through this level.

Nevertheless, Barclays bucked the negative trend and rose 1p higher to 572p amid vague rumours that the Spanish banking giant, BBVA, might be mulling a bid for the group. Speculation of a major deal in the banking arena seems to be growing. Only last week Lloyds TSB shares were boosted by talk that Wells Fargo of the US is considering a move on the group.

Clients of Merrill Lynch must have been happy with the broker's performance. For much of the morning Merrill was heard warning investors that Smith & Nephew is facing a slowdown in trading conditions and weakening profit margins. And just before midday, the medical devices group put out a profits warning which caused its shares to drop 34.5p to 509p. S&N blamed the setback on a shortfall in its key orthopaedics unit and new product launches by rivals.

Rank jumped 19p to 310p amid rumours of a bid for the owner of the Mecca Bingo and Hard Rock Café chains. According to gossips, a private-equity house is preparing a 320p-a-share offer. But Seymour Pierce was sceptical that a takeover of Rank is imminent because of the difficulty the company is having selling its Deluxe media division.

The broker believes that the spin-off of the business is being hampered by the change of ownership clauses in some of its key contracts. Seymour Pierce said: "We can see considerable merit in a private -equity acquisition of Rank but we are sceptical of any bid working before the separation of Deluxe is complete."

Lower down the pecking order, French Connection soared 40.25p to 285.25p despite posting poor interim results. There was evidence of stake-building in the retailer after the publication of the figures as a series of large trades crossed the market at way above what was then the going price for the stock.

Some suggested that Brandes, the US investment fund, had been adding to its stake in French Connection while others pointed the finder at the Icelandic retailer Baugur. At the last count, Brandes controlled 4.6 per cent of the retailer while Baugur's holding was about 3 per cent.

Xaar dropped 1p to 289.25p before today's results from the group. City sources say that along with the figures will come news that the inkjet printing specialist is planning to set up a new plant in the UK. This move should create up to 30 jobs. JKX Oil & Gas rose 10p to 201p after positive news from its drilling programme at Poltava in the Ukraine.

Finally, DataCash ticked 0.5p higher to 131.5p on talk that the money-transfer company has enjoyed buoyant trading throughout the summer.