Market Report: Banks and insurers savaged in Lehman-led rout

Traders across the City had their tin hats and waterproofs out yesterday, after the US's "Bloody Sunday" hit London.

As expected, there was talk of nothing else in the wake of the collapse of Lehman Brothers, an investment bank that was not so long ago one of the most venerable names on Wall Street.

One trader said as the wave of blood hit the markets: "Most of the people I'm talking to are saying 'I don't know what to do', and those are the ones who have time to talk. At the moment, every instinct has to be to stay short."

The market retched after the opening bell in London, plummeting more than 5 per cent, and flirting with the year low of 5,071. It managed a slight rally to close almost 4 per cent lower at 5,204.2. This was the case across Europe as the Dax in Frankfurt retreated 170 points, or 2.7 per cent, and the CAC 40 in Paris was down 163, or 3.8 per cent.

Every FTSE 100 company fell in the morning. Some were worse than others and there was no surprise to see the banks propping up the leaderboard. The worst was HBOS, which gave up more than 30 per cent of its value as sentiment turned against it. The UK group was hammered over its exposure to Alt-A residential mortgage-backed securities, its funding structure and the wobbles in its share price already this year. It recovered to end the day 17.55 per cent down at 232.5p.

Barclays, which pulled out of bidding for Lehmans late on Sunday, was down 9.84 per cent at 316p, and Royal Bank of Scotland completed the triumvirate of misery, falling 12.2 per cent.

Surprisingly, HBOS didn't finish the day in bottom spot. American Insurance Group's woes also had a big say in London, as the giant insurer was forced to go cap in had to the Fed. The UK insurers plunged with Friends Provident taking the wooden spoon. It landed with a bump, 17.85 per cent down at 81p, while its rival Prudential gave up 9.26 per cent to 500p.

There was no respite brought by the oil stocks either as the price of crude fell to a seven-month low in the US. The exploration and production company Cairn Energy was the worst affected, falling 10 per cent to 2,330p.

JP Morgan and Shore Capital eased their euphoria over Morrisons yesterday. The supermarket chain released results last week, showing it had done remarkably all right out of the credit crunch, as bargain-hunting shoppers were trading down to its stores. Shore cut its rating to "hold", while JP changed from "overweight" to "neutral" and cut the target price from 320p to 275p. It said the group faces a huge amount of pressure on pricing for the rest of the year. Morrisons retreated 5.75p to 253.75p.

One of the least badly hit early on was GlaxoSmithKline, which almost hit par – it ended 0.49 per cent lower at 1,230p – after researchers said its experimental drug for ovarian cancer showed some promise.

By the end of the day, 12 companies had sneaked into positive territory. The utilities looked strong following talk of potential takeover interest over the weekend, with Centrica leading the way, up 1.34 per cent at 322p. The lead stock by the close was Capita Group, which gained 2.42 per cent to 719.5p.

There was a smattering of stocks up on the mid tier in the morning, although more joined in later on. Detica Group rose after the Office of Fair Trading, the UK mergers watchdog, cleared its takeover by BAE Systems. The stock rose 0.74 per cent to 439.75p.

Bradford & Bingley, plunging 15.45 per cent to 31.5p, spiralled to the bottom of the second line, although it had been in a dogfight with the housebuilder Barratt Developments for the privilege. As fears grew over mortgage finance and house prices Barratt gave up 15.28 per cent to close at 45.75p.

In the wider market, the building materials group Ennstone shed a third of its value after issuing a profit warning. Ennstone said it was considering tapping investors for cash as well as selling assets. It closed down 35.48 per cent at 10p.

On AIM, there was yet more bad news for Interactive Prospect. Last week, the group announced it was in talks with its bank over funding requirements and warned on profits. The online marketing group came out yesterday saying it remained in discussion with its bank and had decided to sell all of its UK business, and possibly one of its French subsidiaries. It shed 37.93 per cent to 9p.

There were a few more risers on the growth market, with a couple of gold miners standing out. Solomon Gold topped the table for much of the day, with a 14.29 per cent rise to 4p, before being overtaken on the outside by the travel company Kellan Group. While Kirkland Lake Gold rose 9.71 per cent to 282.5p as the market reacted well to its update on gold production.

Lonrho, another miner, jumped 11.11 per cent following the power-sharing agreement in Zimbabwe, because of its operations in the country.