Housing stocks were in focus last night, after a broker highlighted the sector's "outstanding attractions" – for short sellers.
Shore Capital said UK housebuilders were pricing in a recovery that, given the threat of further house price falls, may still be some way off. The stability implied by recent data is misleading, borne, as it was, by a combination of low transaction volumes and a short-term supply squeeze.
"We believe that, when the full effects of job losses emerge (in the last downturn, house prices continued to fall for 18 months after unemployment peaked) and supply levels increase dramatically (as forced sellers emerge from the shadows) the emperor's new clothes will be revealed," Shore said. "It may not happen today, or even tomorrow, but sooner or later we believe the penny is going to drop and the market is going to wake up to the harsh reality that the storm clouds that engulf the UK housing sector will not go away."
The assessment – complete with the conclusion that the "sector is ripe for short sellers" – bore on the likes of Persimmon, down 1.7p at 467.2p, and Redrow, down 2p at 215p, both of which are rated "sell" at Shore. Bellway, down 3p at 833.5p, Barratt Developments, up 0.9p at 252.8p, and Bovis Homes, up 2.6p at 473.1p, are also rated "sell". Taylor Wimpey, the broker's sole "hold" rated stock, fell to 42.4p, down 1.56p.
Overall, the FTSE 100 lost its momentum, easing by 5.98 points to 5159.72, while the FTSE 250 gained 46.17 points to 9215.57, as a raft of broadly in-line economic data prompted profit-taking in parts of the market.
Insurance issues led the benchmark index, with Legal & General, which was among the strongest in the session before, claiming pole position, closing almost 5 per cent or 3.75p heavier at 82.75p, on account of takeover chatter.
Resolution was once again mooted as a possible suitor, as was Generali and Australia's AMP, although the first two theories were played down by traders, who attributed the speculation to weekend press reports suggesting that L&G had put together a defence document to ward off predators.
A fourth rumour anticipated a merger with Standard Life, which gained 3 per cent or 6.3p to 213.2p amid reports that it was in talks to sell its mortgage-focused banking business.
In the wider sector, Aviva gained almost 3 per cent or 12.4p to 431.2p.
Elsewhere, AstraZeneca, which was the focus of rumours mooting bid interest from Novartis earlier this week, failed to make much headway, edging 6.5p, or less than half a per cent, higher to 2835p, as Collins Stewart downgraded the stock to "sell", saying recent takeover talk was "likely to come to nothing".
"AZN (like Novartis) has intense pipeline pressures over the next five years, but the most probable way out is cost-cutting – which we believe is a credible strategy," the broker said. "If not, then a straight 'merger' looks far more likely than [a deal at] an attractive premium."
Over in the banking sector, Barclays gained 1.2 per cent or 4.25p to 369.25p, as traders pored over remarks by the chief executive, John Varley, who was speaking at a Bank of America Merrill Lynch banking and insurance conference in London. Talking about payouts, Mr Varley said: "For the second half [of] 2009, we intend to make an interim dividend payment in December, and a final dividend payment in March of next year."
HSBC was 2.5p firmer at 725.8p after UBS reiterated its "buy" stance, noting that recent news of the chief executive's move to Hong Kong was "more than a reflection of where earnings are currently located.... It flags the beginning of a reversal of a westward expansion begun in 1980 with the acquisition of Marine Midland," the broker said.
"With three-quarters of group assets outside Asia, the refocusing will likely be an extended one. However, with the hoped-for Shanghai-A listing, we believe the narrative of HSBC as an emerging markets rather than a global bank will be difficult to avoid."
Further afield, Investec undermined sentiment around FirstGroup, the transport group, which fell to 424.7p, down 3 per cent or 13.3p, after the broker switched its stance to "hold" in a sector review. Stagecoach, which was moved to "buy", was broadly flat, closing 0.2p behind at 164.1p.
"Firstgroup has little exposure to further rail downgrades, but must still pay down debt and manage the struggling Greyhound business," Investec said. "Potential further risk comes from US school buses as a result of fiscal pressure."
Great Portland Estates was among the fallers in the UK real-estate space, easing by almost 3 per cent or 8p to 272p, after Credit Suisse revised its stance on the sector to "market weight" from "overweight".
"UK economic momentum is no longer the best," Credit Suisse strategists said, explaining the change of heart. "The UK has moved from top to bottom of our regional economic score-card (based on the level and change in PMIs). Household leverage and house price valuations are more extended in the UK than the US and the structural government deficit is the worst in the OECD."