MARKET REPORT: Sterling effort from second-liners as blue chips slump

The further slide in the pound induced a bout of schizophrenia among market-makers yesterday, with the heavyweight stocks which have led this year's charge tumbling back and the second-liners taking up the running for a change. Banks and pharmaceuticals were in the forefront of the ragged retreat from Thursday's all-time high, leaving the FTSE 100 index flirting with a collapse back through the 5,000 barrier.

It ended 55.5 points lower at 5031.3, having touched 5009.4 at lunch- time on fears for Wall Street. Interest rate fears sent the Dow Jones plummeting, but despite a fall just shy of 110 points by the time London closed, bottom-fishers had returned by then to leave the UK market off its lows.

Lloyds TSB, one of the high-fliers this year, lost 24.5p to 753.5p as profits-takers moved in to take advantage of the shares' strong run on the back of sparkling profit figures earlier in the week. Positive noises from SBC Warburg, HSBC James Capel and Dresdner Kleinwort Benson could not prevent Barclays slithering 26.5p to pounds 14.21p. Otherwise it was the Scots which suffered the most damage, with Royal Bank of Scotland a leading casualty in the sector,down 20p to 629.5p, and Bank of Scotland slipping 10.5p to 436.5p.

Drugs, too, suddenly lacked the protection for investors they seemed to have while the pound was rampant. The two-way pull in Zeneca evident on Thursday after the interim figures went the other way yesterday, dragging the shares back 62p to pounds 19.90. Its peers fared only a little better, with Glaxo Wellcome slipping 38p to pounds 12.87 and SmithKline Beecham giving up 30.5p to pounds 11.67.

Other former "safe haven" stocks to receive a bloody nose yesterday were to be found among the oil and retailing sectors. Shell Transport & Trading was the third-biggest faller in the index, relinquishing 15p to 443.5p, the shares hastened on their way by disappointing figures on Thursday. Lasmo, which has basked in the glow of the market since its recent results, fell 8.5p to 279p.

But what the pound taketh away, it also giveth back. Yesterday's fall in the currency, taking the three-day fall to around 14 pfennigs against the German mark, left a swathe of British industry breathing a collective sigh of relief. Smiths Industries, having just tied up an agreed bid for medical equipment to gas monitoring group Graseby, was a big gainer as the currency move relieved pressure on its overseas earnings. The shares bounded 37p to 870.5p. LucasVarity was another foreign earner in the vanguard of the market's rise, picking up 9p to 217.5p, with other engineers not far behind. TI added 22p to 615.5p and GKN, another company to delight with results this week, putting on another 39p to pounds 12.26.

But the other big story yesterday was growing optimism that interest rates are near their peak in the wake of the Bank of England's Monetary Policy Committee's decision to raise rates by 0.25 per cent. Building materials groups, many of which are also foreign earners, get the double boost of lower money costs and improved overseas results. That helped RMC, with big German operations, put on 32.5p to pounds 11.05. The good news also brought Hanson, which has underperformed this year, a welcome 10p gain to 327p.

But the prize went to Blue Circle, the cement giant, which gained added impetus after Dresdner moved the stock on to its buy list, helping the shares climb to the top of the Footsie gainers yesterday with a 20.5p jump to 447p. Another of the building materials groups favoured with a recommendation was Pilkington, up 6p to 150.5p after being upgraded to a "market outperformer" by Goldman Sachs .

Most of the good news was for once concentrated amongst the smaller stocks, with the FTSE 250 second-liners's index adding a chunky 52.3 to 4650.5 and the SmallCap index putting on 12.6 to 2,209.8.

Manufacturers, like Low & Bonar up 25p to 241p and Yule Catto 35p ahead at 338.5p, are better represented lower down the stock market pecking order, boosting the indexes yesterday.

The lower echelons were enlivened by a 63p-a-share agreed bid from Danisco, a maker of food ingredients, for Borthwicks. The offer boosted Borthwicks 17.5p to 61.5p.

Elsewhere, Rank added 7.5p to 347.5p after BZW and NatWest waded into the market for 4.9 per cent of its shares at 345p, nearly half the amount the leisure group said on Thursday it would buy back. At the other end of the scale, Memory Corporation jumped 7p to 35.5p on news of a tie-up with a US group.

Taking Stock

Cortecs, the little biotechnology group, spurted 24p to 202.5p for a two-day gain of 40p as the market warmed to the prospects for its new osteoporosis treatment. The company said on Thursday that it planned to file for approval of the drug in Europe before September after the results of the latest clinical trials confirmed earlier positive findings.

Two directors were cashing in on the equity boom yesterday. Keith Oates, Marks & Spencer's deputy chairman, netted pounds 347,000 after selling 100,000 options at 601p received after exercising at 254p a share. Separately, Christopher Castleman, a director of Standard Chartered, sold 35,000 shares at pounds 10.40 to pick up pounds 364,000 in the wake of the bank's well-received figures earlier in the week.