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Market Report: Broker's U-turn helps lift British Airways

A "buy" note from the Royal Bank of Scotland boosted the airline British Airways, which rose to 157p, up 7.53 per cent or 11p, last night.

The broker switched its stance from "sell", arguing that the "time to buy airlines is when sentiment is wretched".

"We do not recommend buying airlines if their survival is questionable. But we see BA as a low bankruptcy risk. At September 2008, it had gross cash of £1.83bn. Its capital expenditure plans are modest, as are its debt payments," RBS said.

The broker added that the merger with Iberia still had a good chance of succeeding, unless BA and Lufthansa did an asset trade of BMI for Iberia. RBS was also hopeful for the company's anti-trust immunity application with American Airlines and about the likely operational and financial benefits from Heathrow's Terminal 5.

The assessment overshadowed a sharp rise in the oil price, which rallied on news of China's stimulus package.

Overall, the FTSE 100 was up 38.96 points at 4,403.92 and the FTSE 250 climbed to 6,656.56, up 70.98 points, after a lacklustre start on Wall Street pulled the market back from earlier highs.

Much of the strength came from the mining sector, which cheered China's plans to pump more than half a trillion dollars to stimulate its economy. Anglo American was the strongest on the senior index, up 11.56 per cent or 156p at 1,506p, while Xstrata, at second place, gained 11.52 per cent or 123p to 1,191p and BHP Billiton, at third place, climbed to 1123p, up 10.64 per cent or 108p.

Exane BNP Paribas said that, given China's disproportionate weight in metals consumption, the news should be positive for the entire sector.

The broker added: "China accounts for 55 per cent of iron ore seaborne consumption, 40 per cent of coking coal, 38 per cent of carbon steel, 35 per cent aluminium."

Oil-related issues were also firm and Wood Group, the oil services specialist, gained more than 10 per cent or 22p to 239p. Petrofac was up 5.8 per cent or 22p at 401p, while Amec climbed to 539p, up 4.46 per cent or 23p.

On the downside, retailers after Tesco, down almost 6 per cent or 20.2p at 323p, reported a fall in recent underlying sales in South Korea, tendering fresh evidence of the dip in global consumer demand.

As a result, Kingfisher was down 6.12 per cent or 7.7p at 118.2p and Next lost 3.95 per cent or 46p to 1,120p. Sainsbury's was also weak, losing almost 2.32 per cent or 6.5p to 274p.

Real estate stocks remained unsettled after Hammerson, down 3 per cent or 21p at 678p, issued an in-line update, but said that it expects current challenging conditions to "persist for some time". The news depressed Land Securities, which was down 3.44 per cent or 38p at 1,066p, and British Land, which slipped to 606p, down 2.34 per cent or 14.5p.

Liberty International was also weak, losing 3.36per cent or 22p to 633p after Credit Suisse reduced its target price for the stock to 657p from 702p.

"Expectations of widespread tenant failure among retailers post the Christmas trading period are running high and, if correct, will shape landlords' decisions for the year ahead," the broker said, "... this will include decisions with regards to the dividend in the case of many, particularly Liberty."

The banking sector was on the back foot after Spain's Santander launched a surprise rights issue, the US government extended another lifeline to AIG and Fannie Mae, the American mortgage provider, posted a record loss. The developments overshadowed an in-line update from HSBC, down 11p at 735.5p, which quashed talk of a possible capital raising, but indicated further deterioration in the US.

HBOS was the sole riser among the UK majors, up 3.26 per cent or 3.4p at 107.7p, following reports, played down by traders, that the Bank of China may counter Lloyds TSB's merger offer. Lloyds was down 5.3p at 195.2p, Barclays lost 3.2p to 185p and Standard Chartered was down 44.5p at 895.5p.

On the second tier, Imperial Energy fell 6.1 per cent or 65p to 1000p after reports that ONGC, the Indian oil & gas group that agreed to takeover the business earlier this year, was looking to renegotiate its bid. Rival reports suggested otherwise, but failed to reverse the losses.

Southern Cross Healthcare was up 4.48 per cent or 4.5p at 105p after UBS reiterated its "buy" rating on the stock, calling attention to the current depressed valuation.

"Assuming the company reports a solid set of results [in December] in line with consensus and a new chief executive is appointed, we think the stock should start to re-rate to levels more in keeping with its peers," the broker said, adding: "Current levels present a good buying opportunity."