Market Report: Banks unsettled as Footsie rally fizzles out in one day

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The banks came under pressure yesterday, with Royal Bank of Scotland trading lower as Monday's market rally fizzled out last night.

The state-backed lender was marked down by 1.75p to 50p, leaving the Treasury with a thin profit on its stake, after Deutsche Bank said the share price was up with events.

RBS's quarterly update showed both the value in its core business and progress with restructuring. However, with the stock trading on multiples of seven times forecast earnings for 2012, and with the Government still holding as significant majority stake, Deutsche abandoned its "buy" recommendation, indicating that it might be time for a breather.

The broker said RBS continued to offer hope for gains in the longer term as the Government moved to sell down its interest and the non-core business shrinks. Deutsche adopted a "hold" stance with a revised 55p target price, compared to 50p previously.

The wider banking sector was also unsettled as Monday's euphoria about moves to quell southern Europe's debt crisis gave way to concern about whether the weaker eurozone nations could deliver planned budget cuts. This prompted profit-taking around the likes of Barclays, which was 4.2p lower at 325.4p, and HSBC, which fell 10.2p to 661.4p. Standard Chartered was down 53.5p at 1,702p and Lloyds fell 0.7p to 60.3p.

Overall, the benchmark FTSE 100 index touched a session low of 5,257.15 as worries about Europe's fiscal woes resurfaced. Domestic political uncertainty also played its part, with the mid-cap FTSE 250 index, which is considered more representative of the British economy, striking a low of 9,928 points as traders watched for news from Westminster.

BNP Paribas did its part to rattle nerves in the morning, saying that a pact between the Labour Party and the Liberal Democrats was "the least liked option by markets" and would "almost guarantee" a cut in the UK's credit rating.

"Moody's suggested [on Monday] that the UK would not be downgraded while parties hold coalition talks," BNP analysts said in a note to clients. Late news that the Lib-Lab talks had ended prompted a partial turnaround, with the FTSE 100 recovering to end 53.21 points lower at 5,334.21, and the FTSE 250 climbing back to 9,976.86 – an overall decline of 27.86 points – by the close.

The miners joined the banks on the loser board, with the likes of Xstrata, down 42p at 1,050p, and Kazakhmys, 55p lower at 1,270p, slipping as metals prices eased in response to worries about Europe.

Vedanta Resources was down 100p at 2,451p after Deutsche Bank cut its target price for the stock from 3,102p to 3,086p. Rio Tinto closed 72p lower at at 3,295.5p.

On the upside, the security group G4S, which was the subject of vague bid talk on Monday, firmed up by another 1p to 265.2p as speculators continued to peg their hopes on the possibility of a 375p-per-share offer. The chatter, though still thin on detail, pointed to the prospect of a private equity-led approach, with some putting forward theories of a break-up.

National Grid was also higher, adding 4.5p to 612.5p on the back of some words of support from UBS, which switched its stance from "hold" to "buy" in advance of the group's full-year figures later this month.

"Overall, we expect robust numbers driven by the UK regulated business and lower interest costs," the broker said, keeping its target for the stock unchanged at 655p. UBS added that, at current levels, "National Grid yields the highest dividend within the regulated space".

Elsewhere, the pubs sector was fired up by Enterprise Inns, which rose by more than 14 per cent, or 17.2p, to 139.3p after announcing the agreement of a new £625m debt facility alongside its interim results.

KBC Peel Hunt, which switched its view from "sell" to "hold", said the refinancing constituted a "significant removal of uncertainty", while Deutsche Bank, which maintained its "buy" stance, said it now expected Enterprise to reinstate its dividend at the time of next year's interim results. In the wider sector, the read-across from Enterprise drove Punch Taverns to 83.4p, up more than 5 per cent or 4.4p, while Marston's rose by 3p to 96p.

Further afield, Barratt Developments was 2.1p higher at 116.5p after Morgan Stanley urged clients to capitalise on the weakness inspired by the prevailing uncertainty in Westminster. Housebuilders have been adversely affected by the election result, which the broker attributed to "uncertainty over future macro-economic policy and potential changes to the planning system".

"In the near term, activity could be impacted until a new government is in place but given the general commitment of all parties to ensure economic stability and control the budget deficit, uncertainty on macro policy should abate," Morgan Stanley said. It repeated its positive view on both Barratt and its sector peer Taylor Wimpey, which closed 1p lower 36.88p. Of the others, Bellway and Berkeley were also out of favour, sliding by 30p to 710p and by 32.5p to 776.5p, respectively.