Market Report: Election expectations fail to keep Capita in favour

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Capita was held back as trading volumes thinned out last night ahead of the bank holiday weekend.

The outsourcing group was hit amid worries that the market might have priced-in the likely post-election boost from public-sector spending cuts. The FTSE 100-listed company is among a handful of stocks that are pegged to benefit from budget cuts, with traders anticipating a pick-up in business as the next government calls in outsourcers in a attempt to reduce overheads and pay down the deficit. But Morgan Stanley warned that any gains looked discounted and Capita, which has rallied strongly since its full-year results in February, was trading at a significant premium to the market.

The concerns sent Capita's stock down by 21p to 799p, and the broker lowered its stance from "equal weight" to "underweight".

The wider FTSE 100 index also came under pressure, shedding 64.55 points to 5,553.29, albeit against the backdrop of a dip in activity ahead of the long weekend. The mid-cap FTSE 250 index fell by 26.96 points to 10,366 as traders watched out for news from Europe, where politicians and officials were trying to hammer out a comprehensive bailout package for Greece.

News from the credit ratings agency Moody's, which downgraded nine Greek banks, and the US, where official figures showed the economy had grown at a slower pace in the first quarter than forecast, added to the anxious mood across dealing rooms.

Barclays was the weakest of the blue chips, falling by more than 6 per cent, or 23p, after reporting a rise in profits for the first quarter. The slide was pinned on Barclays Capital, the group's investment banking arm, which did not fare as well as its some of its rivals.

That said, much of the wider sector was also weak, with the Royal Bank of Scotland down 1.85p at 54.35p and HSBC tumbling 10p to 668p following reports of an unpublished PricewaterhouseCoopers analysis warning that new banking regulations could undermine the economy and shave two percentage points off growth.

A number of mining stocks were also hit. Commodity prices did pick in the morning but the markets softened as investors backed off in the afternoon, piling pressure on the likes of Rio Tinto, which was 154p lower at 3,379p, and BHP Billiton, which fell 64p to 2,025p. The precious metals producer Randgold Resources, on the other hand, continued to draw steam from the appetite for gold, closing 165p higher at 5,585p last night. Oil plays were mixed, with Royal Dutch Shell, for instance, firming up by 14.5p to 2,047.5p. But BP, which continued to attract concern because of its oil spill in the Gulf of Mexico, retreated by 1.5 per cent, or 8.7p, to 575.5p.

The latter was driven lower despite brokers arguing that the stock had been oversold. Evolution Securities, for example, said the sell-off, which has shaved more than $20bn off BP's market value, overestimated the likely cost of the clean-up and any related lawsuits. This view was echoed by Goldman Sachs, which compared the incident to the Exxon Valdez disaster. "The total cost to Exxon was $3.8bn, including compensatory payments, clean-up payments, settlements and fines," Goldman said, reiterating its "buy" stance on BP. "It would take 52 days of uninterrupted [spilling at the rate of] 5,000 barrels per day for this incident to reach the same size as Exxon Valdez."

The packaging group Rexam was supported by UBS, which switched its stance to "buy" ahead of the company's update next week, helping the stock to rise by 4.2p to 323.4p. The broker said it expected to hear of improvements both in Rexam's drink cans business, particularly in Europe, and in plastics. Also on the upside, the advertising group WPP was 6.5p ahead at 698p after posting a positive update.

"The WPP analysts' meeting confirmed the sequential improvement in trading from the fourth quarter of 2009 to the first quarter of 2010," Numis said, reiterating its "buy" view on the stock. "The group indicates that the industry has moved from 'staring into the abyss' though to 'less worse' in 2009 to 'stabilisation' for 2010."

The services group Mouchel, which saw off a takeover approach earlier this year from the defence services firm VT, was in focus following a trade press report indicating that it might be back up for sale. The report suggested that Mouchel had appointed advisers to scout for suitors, with the US group Aecom being mentioned as a potential buyer. Sources close to the company said there was no foundation to the report, however, and indeed the suggestion struggled to find an audience in the market, with the stock falling by 3p to 197p last night.

The recruitment group Hays firmed up by 0.6p to 111.8p after an investor outing on Thursday. The meeting did not win over Panmure Gordon, which reiterated its "sell" view, saying macroeconomic concerns and uncertainty about the public sector was likely to "weigh on the share price in the near-term". "While we fully expect Hays to deliver strong growth during the next cycle, coupled with a meaningful dividend, we do think there are better ways to play a more geared recovery in this sub-sector," the broker said.

FTSE 100 Risers

Up: Intercontinental Hotels 1,159p (up 23p, 2 per cent) Natixis revises target price for the stock to 1,350p, compared to 1,150p previously.

Up: Next 2,295p (up 22p, 1 per cent) The fashion retailer trengthens as UBS reiterates its "buy" recommendation and 2,350p target price.

Up: Pearson 1,051p (up 1p, 0.1 per cent) Firms up after posting a trading statement in which it reports a good start to the year.

FTSE 100 Fallers

Down: Tullow Oil 1,147p (down 35p, 3 per cent) Downgraded to "hold" with a 1,295p target price from "buy" with a 1,380p target price at Deutsche Bank.

Down: Eurasian Natural Resources Corporation 1,226p (down 30p, 2.4 per cent) Miners retreat as commodity markets relax.

Down: BSkyB 615p (down 10p, 1.6 per cent) Eases amid profit-taking; plans to delist its American depository shares from the New York Stock Exchange.

FTSE 250 Risers

Up: Morgan Crucible 214.8p (up 5.7p, 2.7 per cent) Rallies as speculators pile in, pegging their hopes on rumours of a bid for the materials specialist.

Up: Davis Service 431.2p (up 8.9p, 2.1 per cent) Interim management statement shows evidence of an improvement in margins.

Up: Aegis 130.6p (up 2.5p, 2 per cent) Boosted by the read-across from the advertising group WPP, which posts a positive quarterly update.

FTSE 250 Fallers

Down: GKN 137p (down 8.2p, 5.7 per cent) Falls back as UBS switches its stance on the stock from "buy" to "neutral" with a revised target price of 155p.

Down: Rentokil Initial 127.4p (down 5.5p, 4.1 per cent) Traders bank profits on the back of its first-quarter results; Seymour Pierce retains "sell" view.

Down: Barratt Developments 124.7p (down 2.4p, 1.9 per cent) Falls back with the wider housing sector, which eases amid profit-taking.