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Market Report: BG falls back as buyers leak out of energy stocks

BG Group was among the losers as commodity prices dipped and investors moved out following a warning about its valuation.

The gas giant's shares fell by 3.6 per cent, or 41p, to 1,084p as commodity markets softened and Goldman Sachs, taking note of the recent strength in the share price, switched its view to "neutral" from "buy".

The broker said that in the broader oil and gas sector it preferred exploration and production stocks, recommending Dana Petroleum, which fell 17p to 1,194p as it tracked the oil price. Tullow Oil and Soco International also came under pressure, falling 36p to 1,140p and 9.1p to 420.8p, respectively, despite positive comment by Goldman.

"BG remains structurally one of the best positioned companies in the sector," the broker said. "We believe these characteristics are likely to lead to outperformance in the long term.

"However, on a 12-month view, the stock's valuation looks nearly full and there is a risk of delays in some of its key development areas."

Goldman cited issues such as the prospect of more stringent deep water drilling norms in Brazil and the potential for disagreements with the government in Kazakhstan.

BP fell as far as 328.4p, touching its lowest level since late 1996, before closing 15.3p lower at 334.2p as traders awaited news from the Gulf of Mexico. Separately, there was evidence that short-sellers were targeting the oil major's shares, with borrowing in BP's US shares jumping by 140 per cent between 7 June and 17 June, according to the market information provider SunGard Astec Analytics.

Overall, the benchmark FTSE 100 index was 1 per cent or 52.13 points behind at 5,246.98 as the initial optimism generated by China's decision to allow the yuan to appreciate against the dollar began to fade. The mid-cap FTSE 250 index, which is seen as more representative of the British economy, was 69.86 points lower at 9,927.95 after the Chancellor, George Osborne, outlined the coalition Government's emergency budget.

Among the key measures he announced was change in VAT, which is to rise from 17.5 per cent to 20 per cent at the beginning of next year. The move, though expected to weigh on consumer spending, was widely anticipated and sparked strength in parts of the retail sector.

Relieved that the proposals was no worse than feared, buyers waded back into Marks & Spencer, which closed 5.7p higher at 348.4p, and Next, which ended 27p ahead at 2,170p.

The Argos owner Home Retail Group and the FTSE 250-listed video games retailer Game went in opposite directions, gaining 3.1p to 238.1p and falling 3.65p to 77.5p, respectively, after the Government said it would not go ahead with what Mr Osborne termed "the poorly targeted tax relief for the video games industry". Supermarkets were cheered by the VAT plans. There had been fears that the coalition, in an attempt to sidestep a rise in the basic rate of VAT, could extend the tax to exempted items such as food. As it was, no such change was proposed, boosting the mood surrounding the likes of Wm Morrison Supermarkets, which was 6.9p stronger at 268.1p, and Tesco, which went from a session low of 379.5p to closed 4.95p higher at 393p at the end of the day.

Financial stocks were also pleased with Mr Osborne's statement. The Chancellor announced a banking levy which is expected to raise £2bn – a lot less than feared by the City, which has benefited from billions upon billions of state support in recent years.

Lloyds and Royal Bank of Scotland, both of which are partly owned by the taxpayer, rebounded in response to the news. Lloyds went from a session low of 55.49p, a fall of more than 2 per cent, to close more than 4 per cent higher at 59p. RBS ended the day up 0.31p at 47.08p, bouncing back from an earlier low of 45.39p.

Barclays, though off the day's lows, was less successful, closing down 6.35p at 310.75p. Standard Chartered also failed to make any headway and eased back by 8p to 1,784.5p. On the downside, miners were hit by the same factors as stocks in the the oil and gas sector, giving back Monday's gains as the commodity markets weakened. Xstrata fell by 28p to 1,048p, while Eurasian Natural Resources Corporation, which this week is hosting a site visit for analysts and institutional investors to Kazakhstan, was 32p worse off at 1,030p.

Further afield, the housebuilders gained ground, with Barratt Developments rising more than 4 per cent, or 4.6p, to 108.4p amid relief at the Government's plans for capital gains tax (CGT), which is levied on profits from the sale of assets such as second homes.

CGT for higher rate taxpayers will rise by less than expected, from 18 per cent to 28 per cent, while low and middle-income savers who pay income tax at the basic rate will continue pay the current rate of CGT. The fact that the changes took effect last night also helped because it left no window for fire-sales, according to analysts.

Michael Page International was 3.7p better off at 406.3p after UBS move the stock from "neutral" to "buy", anticipating news of a return to growth when the recruitment agency posts its second-quarter results next month.