Debenhams advanced by more than 14 per cent, or 6.25p, to 49.75p yesterday after a string of rumours and a round of buying across the sector forced short sellers to call off their bets.
Market speculation suggested that Baugur, the Icelandic retail investor, was preparing a 70p-per-share bid for the debt-laden retailer. A second rumour mooted the possibility of further stake-building by Milestone Resources, the investment group linked to Landmark, the Dubai-based retailer. The talk was supplemented by continuing weakness in the price of oil, which sparked hopes of a cut in interest rates.
Analysts said that, given the relaxation in the oil price, there was a feeling in the market that the Bank of England may soon be confident enough to cut rates to stimulate the economy, thereby boosting the fortunes of the retail sector. They played down the Baugur bid rumours, pointing to Debenhams' debt- laden balance sheet. Further stake-building by Milestone, which raised its holding beyond 10 per cent last week, was more likely, analysts added.
Traders said the combination of deal rumours and better sentiment across the sector had sparked a round of short covering, which accounted for the spike in the Debenhams share price, offsetting the impact of a negative note from UBS. According to Data Explorers, 18.25 per cent of Debenhams stock is out on loan.
In the wider sector, Woolworths was up 6.79 per cent, or 0.38p, at 5.98p and Home Retail Group gained 6.41 per cent, or 13.75p, to 228.25p.
Elsewhere, vague bid rumours took BT to an intra-day high of 175.4p. Early speculation suggested that Dubai Capital, a division of Dubai Holding, was considering an offer for building a stake in the telecoms group. By the close, BT had eased back to 173.5p, up 1.5p.
Overall, the FTSE 100 was up 134.3 points at 5,454.5 and the FTSE 250 gained 288.3 points to 9075.7 as investors celebrated continued weakness in the price of oil.
On the FTSE 100, financial stocks were among the strongest. Pleasing results from Legal & General, which was up more than 12 per cent, or 11.7p, at 108.3, gave strength to insurance stocks. Legal & General was in third place on the leaderboard while Standard Life, in eighth place, gained 9.41 per cent or 21p to 244.25p.
Among the banks, results from Standard Chartered, which was up 8.36 per cent. or 119p. at 1542p, and news of a disposal by Barclays, which gained 8.84 per cent. or 30p. to 369.25p, lifted sentiment.
Traders cited a short covering in HBOS, which was the strongest in the banking sector, up 12.18 per cent, or 36.5p, at 336.25p.
Travel stocks were lifted by weaker commodities prices and Thomas Cook claimed fourth place on the FTSE 100 risers, up a neat 12 per cent, or 24p, at 224p.
Resource stocks were not so lucky and Eurasian Natural Resources Corporation lost 48p to 950p. Ferrexpo was down 11.5p at 257p and Tullow Oil lost 32.5p to 735p.
Elsewhere on the FTSE 100, the supermarket group J Sainsbury climbed to 347.25p, up more than 6 per cent, or 19.75p, after UBS highlighted the possibility of renewed bid interest from the Qatar Investment Authority. The broker added Sainsbury to its M&A Master List, citing recent stake-building by the QIA, which now owns more than 27 per cent of the company.
UBS also helped Astra-Zeneca, the pharmaceutical giant, which gained 62p to 2549p. The broker increased its target price for the stock to 2,450p from 2,225p, citing a positive outlook in the short term.
On the FTSE 250, the staffing group Michael Page International, a significant amount of whose stock is out on loan, soared by 32.7 per cent, or 86.75p, to 352p after confirming a preliminary unsolicited approach from Adecco, the Swiss recruitment group.
Traders said confirmation of the Adecco approach had highlighted the possibility of M&A activity in other depressed sectors. Media stocks in particular were in focus as investors hoped for similar deal activity, thereby prompting a round of short covering. As a result, Johnston Press, 14.83 per cent of which is out on loan according to Data Explorers, was up 35 per cent, or 14p, at 54p. In Trinity Mirror, which gained 16.74 per cent, or 19.25p, to 134.25p, 19.6 per cent of stock is out on loan.
"There is short covering in a lot of places after this deal. The oil price has only helped push it further," said one trader.
Among smaller companies, specialist property investor Capital & Regional soared to 184.5p, up more than 30 per cent, or 42.75p, as traders cited rumours that a management buyout may be in the offing. The speculation, which surfaced late in the afternoon, suggested that an MBO proposal may be unveiled as early as this week.