Lloyds Banking Group led UK-focused banks lower last night, falling behind as the FTSE 100 briefly turned positive for the year.
The profit-taking was triggered by nervousness ahead of the results of regulatory stress tests on American banks, which are expected to indicate the need for additional capital in parts of the sector.
Valuation calls by market analysts also spooked investors, with ING saying that, following the recent surge in sector share prices, the risk-reward profile of UK banks was "unappealing". ING lowered its target price for Lloyds to 105p, below last night's closing price of 113.2p, down 6.5 per cent or 7.9p.
UBS also weighed in, downgrading both Barclays, which retreated 3.4 per cent, or 10p, to 288p, and Royal Bank of Scotland, which fell 4.8 per cent, or 2.3p, to 45.7p, to "sell". ING set a 260p target for Barclays, and 40p target for RBS.
Overall, the FTSE 100 index of blue-chip shares touched a session high of 4,437.61 – just above the 4,434.17 level where it began 2009 – before relaxing to 4,396.49, up 1.4 per cent or 59.55 points, at the close. The FTSE 250 was also firm, gaining 34.37 points to 7,871.2.
The benchmark was supported by positive corporate news, with Sage, which said first-half revenues had climbed 17 per cent, gaining 5.8 per cent or 10.7p to 196p, and Tullow Oil, which announced another Ugandan oil find, rising to 890.5p, up 4.2 per cent or 35.5p.
Intertek, the testing equipment specialist which was the focus of bid talk late last month, was 7.2 per cent or 77p ahead at 1,143p after UBS upped its estimates following strong first-quarter numbers from its French rival Bureau Veritas. Specifically, the broker highlighted the 38 per cent growth, in organic terms, at the rival group's consumer division, saying that the consumer business was key at Intertek, where it accounts for around 27 per cent of sales and 50 per cent of profits.
On the downside, a number of ex-dividend stocks weighed on the FTSE 100, with Drax losing 7.1 per cent or 36.5p to 479p, and Antofagasta falling to 603.5p, down 6.4 per cent or 41.5p.
Bunzl, which was also trading ex-dividend, lost 4.2 per cent or 23p to 523p.
On the second tier, the software group Misys climbed to 160p, up 4.1 per cent or 6.25p, after Merrill Lynch moved the stock to "buy" from "neutral", saying that investors were likely to begin ascribing more value to the company's banking unit.
"During the first-quarter results season, every single exposed vendor (IBM, Capgemini, Temenos) talked about early signs of raising interest levels in the banking sector," the broker said. "While this does not mean the world is back to normality, it nonetheless highlights that banking IT spending will probably recover before other sectors like manufacturing."
DSG International was weak, losing 7.7 per cent or 3.25p to 39p, thanks to Morgan Stanley, which moved its recommendation on the stock to "equal-weight" from "overweight", telling clients that, following the strength in shares since December, it no longer believed that the market was mis-pricing the electrical retail group's risk-reward profile.
"We remain as convinced as ever that the shares have very attractive upside potential if management can deliver on its plans of sustainable operating margin of 3-4 per cent in the medium term (which it has defined as three-five years)," the broker said. "However, trading is very poor and, unlike most UK retailers, deteriorating, with even most of the refitted stores seeing year-on-year sales declines."
Staffing firms, including Michael Page International, which was down 3.1 per cent or 8.75p at 276.25p, and Hays, which was down almost 4 per cent or 3.75p at 93.5p, were unsettled after Adecco, the Swiss recruiter and the world's biggest staffing firm, revealed a slump in first-quarter profits, while striking a cautious note on the outlook for the market for recruiters.
Elsewhere, Filtrona, the speciality plastics and fibre products supplier, fell to 118.5p, down 1.5p, after Panmure Gordon downgraded the stock to "hold" from "buy", telling clients that although the fibres business was likely to show improved results through the course of this year and the next, "pressure on the protection & finishing operations" may weigh on the group for the time being.
Among smaller companies, Innovation Group rallied again, climbing another 13.4 per cent or 1.3p to 11p, despite some negative comment from Altium, which moved the stock to "sell" from "buy".
"Although a trading update in April revealed an encouraging improvement in trading across parts of the group, it also left the door open to the group falling short of full-year expectations once more," the broker said, adding: "Additionally, while the gross cash balance (£25m) was ahead of expectations, [the company's] record on cash generation has been inconsistent at best and we feel that the company may need to raise more cash at some point in the not too distant future."