Market Report: Bears at Goldman give RBS a mauling

Goldman Sachs' Lloyd Blankfein once claimed the group does "God's work" but its analysts were not singing the praises of bankers yesterday. Goldman's banking experts are concerned about the amount of regulation the UK's banks face and the amount of capital they will need to hold on their balance sheets. Barclays and HSBC remained favourites with the brokers but Royal Bank of Scotland was kicked to the kerb.

The wider market regarded the recent changes and delay to Basel III rules as an easing of regulatory risk – and bank shares have rallied since, fuelled by this outlook. But Goldman's bears think the risks have actually increased. The Financial Policy Committee's rhetoric has "sharpened" they claim, and the first report of the Parliamentary Commission on Banking Standards last month added further risk.

Goldman yesterday decided to downgrade taxpayer-backed RBS to sell from neutral, as it thinks it is the "most exposed to near-term regulatory risk". It gave the bank a 340p price target. The shares closed up 1.9p to 367.8p.

Barclays' expected cost-cutting and job-slashing saved it from RBS' fate. Goldman's experts rate it a buy with a target of 350p. They think Barclays' planned "balance-sheet shrinkage" will support the required capital ratios. The shares responded by topping the benchmark FTSE 100 index, adding 5.15p to 305.85p.

The teacher's pet turned out to be HSBC. Goldman has added the bank to its conviction buy list as it doesn't think it will face any capital issues. It set an 860p target. The shares added 6.8p to 717.1p.

The City remains optimistic about global growth, and money is still pouring into equities. After a bumpy morning, the FTSE 100 took off after lunch, but worse-than-expected US data on pending home sales dented some of the enthusiasm. The index passed the 6,300 mark during the afternoon but eased back to end up 9.96 points at 6,294.41.

On the mid-tier index, retail was out of favour with investors after shop-watchers at Morgan Stanley gave their view on the high street.

Retailers have been slashing costs to continue to grow but Morgan Stanley's Geoff Ruddell thinks this penny-pinching can't go on. He reckons this year is going to be just as tough as last — but says retailers have now run out of costs to cut, making shares look overpriced. Morgan Stanley's downbeat view of the sector put Debenhams and Home Retail Group, the owner of Argos, on course for the bottom of the mid-tier index.

Morgan Stanley thinks retailers will go through "Groundhog Year" but share prices "are significantly higher than this time last year", and forecasts are around "10 per cent too high". It took the red pen to Home Retail, reducing it to equal-weight and the company's shares were the worst performers on the mid-cap index, falling 9.6p to 124p.

Mr Ruddell rates the department stores group Debenhams a hold with a share-price target of 110p. The shares lost 3.1p to 102.2p. In fact, the analysts are so concerned that they have downgraded their industry view to "cautious".

They worry about Carphone Warehouse, and slashed their rating to underweight but raised their price target to 155p. The shares lost 7p to 227p. The analysts think Carphone may look to buy in its joint venture partner Best Buy's stake, but they don't think this is necessarily the right route and question the growth potential in selling mobile phones on the high street. Car and bike retailer Halfords – down 4.4p to 348p – is seen as the "most overvalued" alongside Carphone.

There was bad news for investors in mid-cap index coal producer New World Resources. It said the price it could sell its thermal coal for had tumbled because of oversupply, and the shares followed suit and lost 8p to 304.9p.

Investors in AIM-listed Borders & Southern Petroleum were cheered after the explorer gave a better-than-expected outlook for finds at its Darwin development on Falkland Islands. The shares gushed 3.25p to 27.25p.

There was also good news for US-focused Nostra Terra, which added 0.08p to 0.66p after the company said oil production at a well in Oklahoma had beaten expectations. AIM tiddler LiteBulb has bought novelty gift and toys group Bluwstuff in an all-shares deal, and has raised £1.5m to expand. The shares played up 0.02p to 0.72p.

Reports yesterday of a police raid at Firestone Diamonds' mine at Liqhobong in Lesotho accompanied a share-price fall of 0.12p to 4.12p. Firestone said there has been no disruption or impact to operations after the raid last week, and added that it is applying for a court order to repossess its computers.

Buy

DIRECT LINE

Canaccord Genuity initiates coverage of Direct Line urging us all to snap up its shares. The business "is the largest personal lines insurer in the UK" and it sees "two key drivers for profits — improved loss ratio in motor and the net benefit from a £100m cost reduction programme". It gives a target for shares, which are currently 225p, of 240p.

Sell

AVEVA

Dump shares in Aveva, Seymour Pierce recommends. The broker says that the Cambridge-based software company's trading update to 1 October was in line with expectations so it is leaving its forecasts "unchanged". Shares at present are 2,186p a pop; Seymour gives a target price of 1,780p.

Hold

TATE & LYLE

Best to stick to shares in Tate & Lyle, Investec advises. The broker says it "continues to like" the sweetener maker's story, "but the speed of the advance feels uncomfortable, relative to potential troubles ahead at t'mill". It adds that "further caution arises from the sweetener pricing round in the US". It gives the shares — presently at 824p — a target of 850p each.