Market Report: Blue chips leave the small fry behind

BLUE CHIPS once again displayed a clean pair of heels to their smaller brethren. As Footsie's recovery continued the stock market's supporting shares endured another nervous, despairing session.

There were stories that leading fund managers were dumping second-line stocks. Mercury Asset Management, part of Merrill Lynch, was said to have unloaded supporting shares, particularly chemicals and engineers.

The contrast in the fortunes of blue chips and the under-card was dramatic. Footsie jumped 111.4 to 5,214.7 as the mid cap index lost 8 to 4,564.2 and the small cap dropped 3.4 to 2,032.6, yet another low for the year.

The feeling that blue chips had been hit too hard in the downward spiral from the July peak, plus takeover hopes and a growing expectation that interest rate cuts will soon appear, spurred leaders.

But there was unease amid the euphoria. NatWest Stockbrokers' head of research, Jeremy Batstone, warned that shares could be hit by deflationary pressures next year. He suggested a cut of up to 40 per cent could materialise. Still, in the meantime, he expects Footsie will rebound to around 5,800 by the end of the year.

Waters, regarded as safe havens in the market slide, took a bath on the pounds 8.5bn Government demand for price cuts and improvements to the quality of services provided. Severn Trent fell 40p to 1,062p and United Utilities 32p to 908p.

There seemed to be a heavy flow of profit downgradings. Bass, hit last week by a profits warning, was again flat on suggestions that analysts, after talks with the group, were preparing to pull forecasts even lower than the pounds 640m or so they alighted on after the Bass caution.

Storehouse slumped 24.5p to 185p. BT Alex.Brown did the damage. The investment house cut its estimates by pounds 7m to pounds 127m for this year, by pounds 12m to pounds 136m for next year and by pounds 12.5m to pounds 150m for the following year.

Still the takeover speculation industry continued to thrive. GRE, up 19.5p at 277.5p, was again seen as an Allied Zurich target. The feeling that bid action could break out among the depressed insurers lifted Royal & Sun Alliance 46.5p to 553p and CGU 59p to 936p. Tuesday's other bid candidate, Reed International, rose a further 15.5p to 550p.

Granada's investment presentation provided inspiration, with the shares up 51p to 777p; Lehman Brothers said buy, repeating its 950p target.

Marks & Spencer edged forward 4p to 444p as ABN Amro said buy, and Next improved 25.25p to 399.25p after chief executive David Jones picked up 100,000 shares at 370.5p and director Simon Wolfson 270,000 at 370.9p.

ABN was also behind a 26p jump to 377p by British Aerospace, and Cable & Wireless scored from CSFB buy advice, gaining 38p to 558p.

Ladbroke was unfazed by the block on its Coral betting shop acquisition, cantering 17.75p to 222p. Energis put on 52.5p to 775p in a further reflection of the Henderson Crosthwaite buy recommendation.

LucasVarity, the engineer, moved ahead 5p to 200p. There is growing unease about its proposal to move its domicile to the US. John Buckland at Daiwa says the reasons put forward for the switch are at best tenuous, and "the protestations about increasing shareholder value are dubious".

Centrica rose 5p to 111.5p on talk that the Italians were planning to import gas from the company. Oils strengthened on a firmer crude price and hopes of a world oil summit; Enterprise Oil gained 19.5p to 390p.

Supermarkets were largely unruffled by the Office of Fair Trading-sponsored probe. Asda, at one time up 13.5p, ended 3p higher at 174.5p and Tesco gained 2.75p to 171.75p. Safeway, Somerfield and J Sainsbury ended a little lower.

Brake Brothers, supplying convenience food to caterers, was roasted 112.5p to 635p after making what the market regarded as a profits warning. The company, however, disputed such an interpretation of its comments.

The day's worst performer was Infobank, off 77.5p to 42.5p. It blew a fuse after what was unquestionably a profits warning by the electronic systems and software group. The shares were floated at 125p in February last year.

Euro Sales Finance, providing finance to small and medium sized companies, slipped 7.5p to 280p after duly reporting profits of pounds 1.36m against pounds 563,000 and disclosing plans to move from AIM to a full listing.

Memory Corporation's run continued, with the shares moving ahead 6.5p to 28p. They have climbed from 15p on Monday, when BancBoston Robertson Stephens put a 50p target on the shares.

Emerald Energy held at 9.25p. It made encouraging noises about its Gigante drill in Colombia, saying a positive outcome is expected in two weeks. Talk in the market suggests that a 1.2 billion barrel field has been discovered, which could be worth 23p an Emerald share.

SEAQ VOLUME: 943.4 million

SEAQ TRADES: 57,121

GILT INDEX: 111.01 -0.55

NATWEST Enterprise Trust, a venture capital group where National Westminster Bank is the biggest shareholder, jumped 30.5p to 304.5p, a peak, as possible predators made their presence known. At the end of June the company's net assets were around 370p a share. The trust said a number of parties had shown interest. Because of a conflict of interest, ABN Amro is no longer the company's stockbroker, replaced by West Merchant Bank.

ZERGO, an electronic information group, firmed 10p to 265p, a long way from the 476.5p peak hit when information technology shares enjoyed the top of their bonanza this year. The group's shares were firm on HSBC's decision to start producing research on the company. No doubt it was merely a coincidence that on Monday Zergo clinched a pounds 300,000 contract with Midland Bank, part of HSBC.