Market Report: Broker moots merger of Trinity and Johnston

Trinity Mirror and Johnston Press failed to draw any steam out of suggestions that they should merge yesterday as the London market, unsettled by fears for the economy, sank into the red.

ABN Amro said that, given the problems faced by the media sector, "shareholders and management will increasingly press for industry consolidation". "These are desperate times, and they call for desperate measures: we believe a Trinity/Johnston combination makes sense," ABN said.

"The geographical fit is no 'dream ticket', but Trinity has an urban bias, while Johnston has a rural bias, so geographically the fit is not bad."

According to the broker, a merger of the two will bear estimated cost savings of up to £40m, or 5 per cent of the combined cost base.

ABN also upgraded Trinity to "hold" from "sell", citing confidence in national newspapers. The stock fell regardless: negative comment from a number of brokers, and an inclement market, took Trinity down by 13.75p to 95.25p. Johnston Press also succumbed to the market trend and lost 5.25p to 46.75p.

The FTSE 100 made an inauspicious start to the second half. The benchmark index was down 2.6 per cent, or 146 points, at 5,479.9 after the UK manufacturing purchasing manager's index came in at 45.8 in June, indicating the sharpest contraction in the manufacturing sector since December 2001.

Fears for the economy were increased by the continued strength in the price of oil, the latest Nationwide building society report on the housing market, which revealed house prices fell for the eight straight month in June, and by a Citigroup/YouGov poll, which revealed that inflation expectations for the next year leapt to a record high of 4.6 per cent last month.

"It's a very nasty mix," said Howard Archer, chief UK economist at Global Insight. "You come in to the office and it's a nice sunny day. And then you get some UK data which ruins the mood."

The FTSE 250 lost 225, or 2.5 per cent, to 8,920.8.

On the FTSE 100, the outlook for the economy weighed on the retail sector. Disappointing results from the FTSE 250-listed Carpetright, which lost 40.5p to 619.5p, also dampened the mood in the sector and Carphone Warehouse was 14.4p weaker at 183.5p. Next was down 60p at 909.5p and Kingfisher, the home improvement retail group behind the B&Q chain, lost 5.6p to 106.7p.

The banks were hit by rumours of fresh writedowns at UBS and Deutsche Bank. Gossip that Lehman Brothers, the American investment bank, may be sold at the bargain price of $15 per share also sullied sentiment and Royal Bank of Scotland shed 11p at 204p.

Barclays lost 10p to 281.5p and Lloyds TSB was down 9.75p at 301p. HBOS, the country's biggest mortgage lender, slipped below its 275p rights issue offer price, falling 7p to 269p.

The FTSE 250-listed Bradford & Bingley was also weak, losing 0.75p to 63.75p amid vague rumours that Clive Cowdery's Resolution may launch a full-scale bid for the bank.

Eurasian Natural Resources Corporation, the world's biggest ferrochrome producer, was down 158p at 1,175p and claimed first place on the FTSE 100 loser board after third-quarter ferrochrome prices came in lower than expected. South Africa's Merafe Resources agreed to raise the benchmark price in Europe by 6.8 per cent, which was well below market expectations.

The rest of the mining sector was also weak as investors took profits. "A lot of people want to get out of this market – the logic is, take profits and run," said one analyst.

Kazakhmys declined 135p to 1,457p, Antofagasta lost 41p to 617p and Xstrata was down 194p at 3,830p.

On the FTSE 250, the Nationwide survey weighed on the housebuilders, and Persimmon lost 24.5p to 291.5p. Bellway fell 35.25p to 417.25p and Taylor Wimpey lost 2p to 60p. Barratt Developments fell 1.25p at 56.75p, despite reports it was close to finalising a refinancing deal with lenders.

"The sector is facing extremely challenging and unprecedented market conditions," said Cazenove, whose analysts published a housing market briefing.

The recruitment specialist Hays lost 7.25p to 83.25p after UBS move the stock to "sell" from "neutral" in a European support services review.

On AIM, Emerging Metals, a mining company focused on minor metals such as indium and iridium, made its market debut. The company placed 330.8 million shares at 12p and climbed 3p to 15p.

And Mentor Graphics reached agreement on the terms of a revised recommend cash offer of 122p a share for Flomerics, the software group, which rose 19p to 118.5p. After the close, Mentor said it had acquired 31.3 per cent of the company and, in accordance with the City Code, made a mandatory cash offer for the remainder.