Insurance issues were in focus last night, with Legal & General leading the sector higher as bargain hunters piled in. Credit Suisse said that while the market continued to view the sector with a degree of caution, discounting concerns about capital or regulation, the worries were set to recede in the year ahead.
Full-year results should answer concerns about capital, with insurers likely to emphasise the strength of their buffers, while greater clarity on planned European reforms should address worries about regulation. These developments will be key to a rebound in sector share prices, the broker explained, expressing a preference for life insurers such as L&G, which gained 2.8p to 78.95p.
"In all the macro and regulatory newsflow, it would seem the market has forgotten that Legal & General has one of the better and broader life, pensions and asset management franchises in the UK," Credit Suisse said, switching its stance to "outperform".
On the prospect of deal activity, the broker said that while the company would indeed be attractive to anyone seeking to gain scale in the UK market, given the uncertain regulatory backdrop, "it is difficult to see L&G as a bid target at the moment". This could change if regulatory proposals begin to "move in the right direction", and "acquirers gain confidence in the outcome", Credit Suisse added, revising its target price for the stock to 113p from 91p.
Overall, the blue-chip FTSE 100 index fell below the 5300-point mark, easing by 42.68 points to 5260.31, while the FTSE 250 lost 32.1 points to 9293.12 during a relatively quiet session. Sentiment was weak as traders circulated the latest missive from Teun Draaisma and his team of Morgan Stanley strategists, who cautioned on the changing fiscal and monetary framework as authorities around the world move away from "crisis mode". "Sell into strength, as authorities have switched from 'all-out stimulus' to 'let's start some stimulus withdrawal'," they said in a new circular. "Tightening measures are coming in thick and fast around the world."
Similar worries contributed to weakness in the mining sector, which has been under pressure following recent signs of monetary tightening in China. Stocks were also hit by some softness in commodity prices, with Xstrata declining to 1102.5p, down 22.5p, Antofagasta falling by 8.5p to 933.5p and Vedanta Resources easing to 2523p, down 122p. Rio Tinto, down 72p at 3220p, and BHP Billiton, down 20p at 1914.5p, were in focus as European Union regulators opened an antitrust inquiry into their plans for an iron ore joint venture.
Elsewhere, the banks bounced back as traders moved in to capitalise on the weakness sparked by the Obama administration's regulatory proposals last week. As a result, Barclays, which was hit amid concern about the potential impact on Barclays Capital, gained 4.65p to 276p, while the Royal Bank of Scotland climbed to 35.36p, up 0.68p, Standard Chartered gained 17p to 1445p and HSBC firmed 1.2p to 674.8p.
Lloyds was 0.68p behind at 52.92p as Barclays Capital analysts considered the potential impact of the capital reform proposals recently put forward by the Basel committee of the Bank of International Settlements. The proposals could potentially lead to a £3.6bn capital deficit in 2013, the broker said, mooting the prospect of a sale of the bank's life assurance business to plug the gap.
Further afield, the online gaming group Partygaming was 8p stronger at 293.5p after Numis upped the stock to "buy". Last week, Partygaming said it was in discussions regarding potential consolidation opportunities with a number of companies in the gaming sector.
Austria's Bwin is mooted as the frontrunner, with Numis saying that while it was not clear whether anything would emerge from these talks, "consolidation in the sector is inevitable". "We perceive a compelling strategic logic for a Party/Bwin merger," the broker said, raising its target for the stock to 350p.
UBS lifted the mood around JD Wetherspoon, the pubs group, which was 9.6p ahead at 456.9p after the broker moved it to "buy" from "neutral", pointing out that while the growth outlook had improved, refinancing worries were diminishing. "Given the experience of the business in the last year and the improvements in the credit market, we do not anticipate [that] the company will have difficulty replacing its December 2010 facility," the broker said, upping its target for the stock to 530p from 500p.
Also on the upside, Numis aided Debenhams, the department store retailer, which was 0.55p firmer at 65.95p. "After a tough post-Christmas run, Debenhams shares are now trading at [an around] 20 per cent discount to the sector, and are now not expensive even in a 'double dip' scenario," the broker said, revising its stance to "buy" from "add". "Crucially for a value play, we do not, by any stretch, believe [that the] Debenhams business model is 'broken'," Numis added. "Indeed, although there are pressures on the department stores, Debenhams continues to make strides in developing its offer and range."