The home improvement group Kingfisher was in focus as the FTSE 100, which came under pressure amid concern about the Obama administration's banking proposals, tipped deeper into the red last night.
Morgan Stanley said the retailer was well placed to outperform the sector in the year ahead, as its valuation gap relative to its peers failed to reflect the company's exposure to overseas markets and its pricing power. The yield and asset backing the retailer's shares are also supportive, while improved trading and better margins in Kingfisher's European operations should drive forecast upgrades, the broker explained, as it raised its estimates and switched its stance from "equal weight" to "overweight".
"Following a material derating in 2009, Kingfisher is now trading on just 10.2 times [earnings forecasts for 2011], a 6 per cent discount to the industry. We find this difficult to justify, given Kingfisher's strong competitive position," Morgan said. It revised its target for the stock from 215p to 240p. Kingfisher edged up by 0.2p to 223.5p.
Overall, the FTSE 100 endured a volatile session. The benchmark index touched a low of 5,252.04 before recovering to 5,302.99, a fall of 32.11 points, at the close of play. The FTSE 250 fell 92.85 points to 9,325.22.
Barclays retreated 11.65p to 271.35p as traders and analysts tried to gauge the potential impact of President Obama's latest proposals for banking reform, which include plans to curb proprietary trading activities. "Although not directly targeted (and affected), there are lots of open questions about how these developments might impact the European (wholesale) banks and their regulations (politicians and regulators in Europe will certainly closely follow the developments in the US)," UBS said.
Panmure Gordon, meanwhile, weighed in on the possible effect on the interdealer broker Icap, which fell 28p to 397.7p. "According to Icap, about 20 per cent of its trading volumes relate to bank proprietary trading, a figure that we suspect probably underestimates the actual significance of prop to Icap's flows," Panmure said.
However, it added that it was hard to pin down the figure because of the way banks report their numbers, and the nature of Icap's business.
"In our opinion, the greatest risks to Icap's trading volumes are in commodities, equities derivatives and structured credits which all together account for less than a quarter of total revenues," the broker added.
"We are less concerned about Icap's high volume, flow products like rates, treasuries, spot FX, which account for the majority of its trading volumes." Royal Bank of Scotland touched a low of 32.28p before recovering to 34.68p, down 0.6p, at the close. HSBC and Standard Chartered were broadly unchanged, easing by 1.4p to 673.6p and by 2p to 1428p, respectively. Lloyds, boosted by some heavy buying in the final minutes of play, ended 0.3p higher at 53.6p. Earlier, the lender's shares had touched a low of 51p.
In the mining sector, sentiment remained was weak for most of the session, with Xstrata touching a low of 1053.5p. The tide began to turn in the final hours of trading, as Xstrata recovered to 1125p, a climb of 26p. Eurasian Natural Resources Corporation rose 16p to 954.5p, Anglo American was up 17.5p at 2505.5p and Vedanta Resources gained 10p at 2545p. Rio Tinto, on the other hand, closed 2.5p lower at 3292p, which was still an improvement on its session low of 3190p.
There was little notable activity on the upside. A number of defensives, boosted by the waning appetite for risk, spent much of the day in the black, with Drax, the owner of the Drax coal-fired power plant, rising 2.8p to 421.4p. The aero-engine maker Rolls-Royce gained 2.3p to 479.2p. Severn Trent was 1p ahead at 1148p after Morgan Stanley switched its stance on the utility from "underweight" to "overweight".
Cadbury sank slightly lower, easing back by 0.5p to 832.5p after the US chocolate maker Hershey ruled out a counter-bid for the company in the wake of the Dairy Milk maker's agreed deal with Kraft.
Further afield, Partygaming rallied by 16.7p to 285.5p after saying that it was exploring consolidation opportunities with a number of players in the online gambling sector. Its Austrian peer Bwin was seen as the most likely candidate by traders, who quickly piled into the sector, lifting Partygaming's rival 888 Holdings by 4.9p to 116p.
Goldman Sachs boosted the mood around the transport group National Express, whose shares jumped by 4.8p to 206.8p after the broker switched its stance from "neutral" to "buy", citing the impact of unemployment trends.
"Stabilisation in unemployment levels in Europe and the UK should be seen as a lead indicator for like-for-like revenue improvement at National Express," analysts at Goldman said in a note to investors. "Any improvement in the revenue environment should further compliment internal attempts to improve margins."
Goldman added that "for the first time in a number of years" it expected profits from Stagecoach's bus businesses in Britain and the US, as well as its European operations, to grow – "not least as a result of declining hedged fuel costs".