Market Report: Housing sector retreats as market eases

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Housing stocks slipped lower last night. At one point Barratt Developments touched a low of 155.5p, down 8 per cent, as City analysts made the case for further equity across the sector.

Citigroup said Barratt and Redrow needed extra cash "irrespective of market conditions", while Bellway, Bovis Homes and Persimmon could benefit from by raising capital to expand their land banks for the longer term.

In terms of scale, the broker said £400m for Barratt, which closed at 162.5p, down 6.5p, and at least £100m for Redrow, down 1.75p at 190p, would "make sense", with the former cutting debt to less than £900m with a new market capitalisation of about £1bn.

For the remainder, Citi suggested a minimum of £100m (and possibly as much as £300m) for Persimmon, which was down 14p at 345.5p; anywhere between £50m and £250m for Bellway, down 22.5p at 636p; and between £50m and £150m for Bovis, down 9p at 390p. In order to succeed, the three companies may need to line up some prospective land deals, to make a raising of capital more acceptable to shareholders.

"In total, if all of these companies went for the maximum we see likely, then the sector could raise an additional around £1.2bn," Citi said. "This is equivalent to 20-25 per cent of the current sector market capitalisation."

Overall, sentiment was unsettled by concerns about an overnight spike in yields on benchmark US Government bonds, which triggered fears of rising borrowing costs. Although the trend appeared to be reversing as Wall Street opened for business yesterday, traders remained nervous, with the FTSE 100 closing down 28.69 points at 4,387.54 and the FTSE 250 retreating to 7,518.27, down 69.78.

Banks, including Royal Bank of Scotland, down 4.6 per cent or 1.8p at 37.4p, Barclays, down 1 per cent or 3p at 287p, and Lloyds, down 0.5p at 65p, also retreated as the Financial Services Authority, the UK market regulator, revealed the assumptions built into its stress tests, including a peak-to-trough GDP contraction of 6 per cent. Traders attributed the day's declines to the fact that the assumptions were not as bad as many had expected.

Kingfisher was 3 per cent or 5.4p weaker at 176.5p, as was much of the wider retail sector, including Marks & Spencer, down 2.4 per cent or 6.75p at 279.25p; Next, down 2 per cent or 29p at 1423p; and J Sainsbury, down 1.5 per cent or 5p at 318.75p, following news that retail sales, which had risen in April, had fallen in May. The news overshadowed a new circular from Deutsche Bank, which raised its target price for the DIY giant Kingfisher to 230p from 210p.

National Grid was 2 per cent or 12p lighter at 604p, as HSBC scaled back its target price for the utility from 740p to 700p, saying that a probability of a ratings downgrade had increased when Moody's undertakes a review.

Shire was steady, rising slightly to 858.5p, up 2p, after Goldman Sachs moved the pharma group's stock from "neutral" to "buy".

There was little notable activity on the upside, with Cairn Energy, the India-focused oil and gas explorer and producer, gaining 83p to 2,456p, and Intertek rising to 1,058p, up 12p, after HSBC raised its target price for the testing group's stock from 1,190p to 1,310p.

On the second tier, there was no stopping ITV, the broadcaster which rallied another 17.5 per cent or 5.5p, to 37p. The stock, which registered strong gains in the session before Goldman Sachs weighed in with some supportive words, advanced further after Bank of America-Merrill Lynch switched its stance to "buy". The broker also raised its target price for ITV, from 20p to 50p, saying that its main argument "is that ITV is the only broadcaster in Europe that is currently pricing in no recovery".

"We have no impact of further regulatory benefits in our forecasts," the broker said. "This could add £30m to £70m pre-tax and mitigate the risk of any cost creep in a recovery (especially with a new chief executive)."

The broker added that in order for the stock to reach its revised 50p target price, total advertising would need to grow by just 4 per cent over the next two years.

Elsewhere, National Express climbed to 320p, up 7.1 per cent or 21.2p, after Morgan Stanley moved the stock to "overweight" from "equal-weight". Firstgroup, which was upgraded to "equal-weight" from "underweight", was also firm, rising by 1.2 per cent or 4.25p to 372.75.p.

On the downside, Stagecoach was 4.1 per cent or 5.25p behind at 122.75p after the Office of Fair Trading said it had referred the company's acquisition of Preston Bus to the Competition Commission. Amelia Fletcher, the senior director of mergers at the OFT, said the two companies "were very close competitors, as demonstrated by the so-called 'bus wars' that took place in Preston prior to acquisition".

Among smaller companies, another session brought news of another proposed delisting from the Alternative Investment Market. CW Residential, which closed down 10.5 per cent or 5p at 42.5p, posted preliminary results that unveiled a loss. It said it was seeking to exit the junior market.