Market Report: Home Retail rattled by worry over earnings risks

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Home retail group was among the hardest hit as the FTSE 100, hammered by a sudden, sharp dip in the appetite for risk, slumped by nearly 3 per cent last night.

The retailer, which owns the Argos and Homebase chains, was marked down by more than 7 per cent as it went ex-dividend and the market headed south. The slide, which left Home Retail 20.2p weaker at 254.3p, was made worse by a warning from UBS, which lowered its estimates to account for earnings risks. The broker also poured cold water on the prospect of deal activity, arguing that while some food retailers would certainly like to get their hands on Argos – speculators have spent recent sessions touting theories of interest from Asda – "a Competition Commission reference would be almost certain". Beyond that, separating Argos and Homebase "may be costly", UBS said, lowering Home Retail to "neutral" from "buy".

"Earnings risks are rising, with the new Government possibly tightening fiscal policy more rapidly than expected," the broker added, revising its target for the stock to 290p, compared to 330p previously. "VAT may rise sooner, and sterling has continued to decline versus the dollar. The first quarter of the year may start off slowly with more competition in electricals, and cooler weather affecting Homebase. Best Buy [the American electricals chain which has begun setting up its stall on this side of the Atlantic] may only have one store but its website pricing in the autumn is likely to be very aggressive."

Overall, the FTSE 100, which attempted to recover from last week's lows with steady, if unremarkable, gains on Tuesday, veered sharply lower after Germany unveiled a unilateral ban on the naked short-selling (ie downside bets where the short-seller has yet to borrow the security in question) of euro area government bonds, sovereign credit default swaps and 10 German financial stocks until 2011.

The move rattled nerves, with traders worrying about the possibility of other countries following suit, and the benchmark ended 149.26 points lower at 5,158.08. The FTSE 250 index was similarly under pressure, shedding 3.2 per cent or 322.62 points to 9,670.62 as nervous traders sold out.

The declining appetite for risk dampened the mood on commodity markets, which fed through to the heavily weighted mining equities. Xstrata, for instance, fell by 75.8p to 933.7p as investors fled, while Rio Tinto lost 213.5p to 2,2984.5p and Kazakhmys slipped to 1,138p, down 82p. Elsewhere, the threat of ever more onerous regulatory moves derailed the banking sector, with Barclays shedding just over 5 per cent or 15.65p to 290.2p and the Royal Bank of Scotland sliding by 2.12p to 45.2p.

GlaxoSmithKline was the only blue chip that managed to book a gain, firming up by 4.5p to 1,177.5p as investors sought cover. Other defensives fell, but not as sharply as the wider market. Outperformers included AstraZeneca, which was 10.5p weaker at 2,903p, and the consumer goods giant Unilever, which was 16p lower at 1,878p.

Elsewhere, BP, which has continued to attract attention as investors watched out for news from the Gulf of Mexico oil spill, was 10.5p behind at 523.5p. The oil major edged lower despite Bank of American Merrill Lynch, whose analysts has been repeating their "buy" view in notes to clients in recent sessions, adding the stock to its widely followed "Europe 1" list of preferred shares. The broker said the spill had hit BP's market value by around 20 per cent, indicating that the market had already priced in the "worst case scenario" for the group, thereby opening a compelling buying opportunity for investors.

Further afield, the market-wide sell-off quashed any chance of a comeback for Yell, the directories group which slumped by 22 per cent after surprising the market with news of management changes on Tuesday. The stock was down another 8.3 per cent or 3.06p at 33.7p despite UBS doing its best to nudge investors to buy.

The broker said that while chief financial officer John Davis's resignation was negative, it was unlikely to have been linked to trading issues and probably had more to do with plans to fill the chief executive's chair once the incumbent, John Condron, departs. "Give our confidence that [Tuesday's] share price reaction was overdone and our continued belief that Yell will ultimately see a medium-term revenue rebound, we remain buyers," UBS said, trimming its target for the stock to 60p from 65p.

Hansteen Holdings, the real estate company, spent much of the session in positive territory, rising by as much as 2.4 per cent before falling prey to the sell-off, closing 1.05p lower at 66.55p. The trigger for the strength was a well received update, with the company highlighting successful acquisitions in Germany and in the UK.

In response, KBC Peel Hunt said investors better hurry and pile in before Hansteen, which has an estimated firepower of up to £260m, makes new deals. Within the shares trading at a discount and offering a healthy yield of 5 per cent, it may be too late if punters wait for the investment to be fully ramped up, the broker explained, reiterating its "buy" view.