Market Report: FTSE 100 retreats below 4,000 points

The FTSE 100 eased back below the 4,000-point mark last night, as City analysts expressed suspicion about the recent bounce in equities.

Teun Draaisma's team at Morgan Stanley cautioned against reading too much into the clutch of green shoots that boosted blue chip's last week, arguing that, despite the optimism in some quarters, the bear market hadn't yet run its course.

"Our three signposts to identify the end of the bear market [ie, the state of earnings, US housing and bank balance sheets] do not flash green," they said, highlighting that credit markets, for example, continue to lag behind equities, and valuations – although depressed – remained burdened with a bigger downside, rather than upside, risk. We wish to wait for fundamentals to be close to trough before turning more bullish," they added, advising investors to sell into the recent strength.

Investors took their cue, taking the FTSE 100 to a session low of 3959.6. At close, the benchmark was 36.1 points behind at 3993.5.

The FTSE 250, which briefly broke through the 7,000-point barrier, was 40.6 points lighter at 6,885.5 at the end of play.

Rio Tinto was the weakest of the blue chips, sliding to 2,208p, down 11.3 per cent or 282p, following reports that it had drawn up contingency plans to raise about $10bn (£6.8bn) via a rights issue if its controversial fund-raising deal with China's Chinalco unravels.

The wider sector also came off the boil as metals prices retreated from last week's highs. Vedanta Resources, which was downgraded to "hold" from "buy" at Royal Bank of Scotland, fell to 770p, down 5.8 per cent or 48p, while Lonmin tumbled to 1,417p, down 4.5 per cent or 68p.

Weaker oil prices unsettled the likes of BG, which eased by 6p to 1098p despite some supportive comment from Panmure Gordon. Royal Dutch Shell, which was downgraded to "neutral" at Merrill Lynch, fell back to 1,489p, down 28p.

Merrill also reduced its earnings estimates for Shell, saying that it had an increasingly negative view on the outlook for global refining margins. "Put simply, we see significant new capacity additions [largely from Asia] in 2009 combining with a very weak demand picture and high global product inventories to put pressure on margins through the remainder of the year and well into 2010," the broker added.

In the banking space, HSBC, which was 16.2p stronger at 450.75p, lifted the mood after confirming the results of its mammoth £12.5bn rights issue offer. Around 97 per cent of shareholders backed the cash call, with traders highlighting strong demand for the rump, which was said to be covered almost five times.

Others were less fortunate, with Royal Bank of Scotland, down 2.6 per cent or 0.8p at 29.8p, and Standard Chartered, down 3.7 per cent or 37p at 960p, trading lower as investors banked gains from last week's rally. Part of the weakness was attributed to a negative read-across from a new circular from CLSA Asia-Pacific Markets, which highlighted the prospect of further pain in the US banking sector.

Elsewhere, J Sainsbury outperformed Tesco, which lost 5.6p to 327p as Friday's profit taking trend persisted. JP Morgan, which upgraded the stock to "overweight" from "neutral", helped support Sainsbury, which gained 7.25p to 319.25p. "Sainsbury is not a price leader, but we do not think it lags Tesco on price nowadays to any meaningful degree," the broker said. "That is why it has held market share while Tesco has lost more than 40 basis points in a 12-month period in which consumers have been trading down."

On the second tier, parts of the housing sector traded up as investors looked forward to news from Taylor Wimpey, which was again rumoured to be nearing an agreement in its debt renegotiation talks with lenders.

The hopes sent the company's stock flying to 37p, up 29.8 per cent or 8.5p, while its peer Barratt Developments gained 10.2 per cent, or 11p, to 118p.

On the downside, Wood Group, the oil services company, retreated to 238.25p, down 4.75p, under pressure from a weaker oil price and from Panmure Gordon, which initiated coverage with a "sell" rating.

"The oil service companies will be hurt by the reduced capital expenditure of the oil companies. This will lead to lower revenues and a squeeze on margins, which will lead to a major reduction in profits," the broker said, expressing a preference for Hunting, which was flat at 430p, and Wellstream, which was 8p ahead at 502.5p, for better long-term growth prospects.

Among smaller companies, Renovo, the scar-reduction specialist, surged to 30.5p, up 15 per cent or 4p, on confirming the receipt of an unsolicited, preliminary bid approach.

The Canadian-based engineer Azure Dynamics, on the other hand, fell to 1.88p, down 16.67 per cent or 0.38p, after announcing plans to de-list from the Alternative Investment Market. Azure, which is also listed on the Toronto Stock Exchange, said it would give up trading on AIM in May, citing, among other factors, its relatively low number of UK shareholders and the extra costs of maintaining a second listing.