Market Report: Banking rally proves to be a false dawn

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London basked in the glow of the banks' strength in the wake of their bailout for much of yesterday, before Wall Street jitters sent the FTSE 100 back to familiar red-coloured territory. This came despite rumours that the G8 will announce a guarantee of all interbank lending after its meeting this weekend.

HBOS was the top riser for the second day in a row, adding a further 31.2 per cent to the previous day's 40 per cent gains. It closed at 153.5p. Royal Bank of Scotland also continued trudging the long walk back, rising 5.8 per cent to 96p.

The rises came despite the emergence of a Goldman Sachs note which cut the target price on four of the UK banks, although Barclays felt the pain, closing down 13.1 per cent at 241.75p, the worst on the day. Investors turned their backs on the stock after talk that it could tap shareholders for cash.

The two banks' painful recovery helped lead the FTSE 100 higher for much of the day, which had started well with gains in Asia.

One trader said the market was looking for a "welcome breather", adding that the markets were quiet, partly because of those observing Yom Kippur. Yet the US markets were spooked by fears over General Motors and falling vehicle sales. The FTSE 100 closed down 1.21 per cent at 4,313.8, a new four-year low.

The market was backing Aviva yesterday with positive news on its capital position after an analysts' briefing. The market had feared that its surplus capital could have been decimated by the worsening financial situation. The upbeat news sent the life insurer up 5.9 per cent to 434p. A solid trading statement helped lift John Wood Group, the engineering group based in Aberdeen. It rose 10.1 per cent to 277.75p as it said the first half had been strong, and was expecting growth for the rest of the year. The group dampened concerns over financing, saying bank facilities were in place for the next two years and its funding position was good.

The blue-chip index was also supported by miners, which were due a rally, with Eurasian Natural Resources Company the strongest. The Kazakh stock had taken a beating this week on fears of falling demand in China, and a drop in ferrochrome prices. It closed yesterday up 15.8 per cent at 521p. This came despite Morgan Stanley slashing its price targets for firms across the European mining sector, by half in many cases. The utilities companies were on the slide as investors looked to switch out of defensive stocks. Inter-national Power was down 6.9 per cent to 273p, after Dresdner Kleinwort cut its rating to "reduce", over issues with its business model. It upped its rating of National Grid from "add" to "buy", but the stock still tumbled almost 8.3 per cent to 610p.

On the second line, a few of Wednes-day's big fallers made a storming ret-urn. The Anglo-Russian iron ore producer Aricom rallied with the rest of the sector, while investors were slightly more confident of it raising the $1bn in financing needed to develop two projects in Russia. It closed up 10.2 per cent at 16.25p. Heritage Oil also returned despite the volatile oil price, gaining after the smacking it got after failing to sell off some of its assets late last month. It rose 17.7 per cent to 162.75p.

At the other end of the table, a market update sent Henderson Group plunging 18.3 per cent to 74.75p. The slide was brought on as the asset manager warned on its full-year profits. It blamed the global markets deteriorating "significantly", along with the volatility and increased client activity as it expects profits to miss the £90m target it set earlier in the year.

A trading update did for Greggs as well, as the baker warned on profits. Dresdner Kleinwort promptly slashed its price target from 3,700p to 3,000p, saying there was a further downside risk in the run-up to Christmas, cutting 6.3 per cent off its shares to 3,209p.

In the wider market, JJB Sports stormed back to top the small caps after some terrible falls earlier in the week. Traders said it was a mix of the stock being oversold and some short covering contributing to the rises. It ended up 52 per cent at 18.25p.

Investors piled into Centamin Egypt, the gold miner, which closed up 8.4 per cent at 25.75. "It's had a nice little run after a bit of a rollercoaster ride. Lines of stock have been cleared and some retail buyers and buyers from the US are coming in," one trader said.

The retirement home group Wren Homes shrugged off talk it was to go private and announced it was to raise £4m to develop its sites in Warlingham and Crowborough. Shares in the group rose 24.3 per cent to 11.5p.

On the downside, debt group Invocas warned on half-year results, saying it would be "significantly behind" last year's results. The shares were down 33.7 per cent to 34.5p.