Market Report: Loan guarantee concern hits Barclays

Barclays led the banking sector lower last night amid flagging confidence in forthcoming government measures to ease the strain on lending and mounting concerns about the end of the short-selling ban.

Reports suggesting the Government was set to intervene with a £20bn small business loan guarantee scheme were greeted with disappointment, with Cazenove suggesting such a scheme would have "marginal benefit". "[The reported] initiative falls far short of investors' hopes for a more substantial bailout," the broker said, pointing out that hopes of a bigger, more comprehensive package had kept UK banking stocks firm despite some unsettled trading around their peers in the US, where investors are bracing themselves ahead of a round of fourth-quarter trading reports.

Market watchers also highlighted worries about the Financial Services Authority's ban on short-selling in financial stocks, which is set to expire at the end of this week. Given the weak outlook for banks, there was concern about increased selling pressure if there is a resurgence of downside bets in the sector. The various factors combined to send Barclays to the bottom of the FTSE 100, down 10.13 per cent, or 18.7p, at 165.9p.

Lloyds TSB was down 5.47 per cent or 7.7p at 133p while HBOS, which is set to delist today ahead of merging into Lloyds, retreated to 81p, down 3.69 per cent, or 3.1p.

Overall, the FTSE 100 closed down 27.04 points at 4,399.15 while the FTSE 250 fell 138.7 points to 6,547.29. Although weak, the market pared losses from earlier trading thanks to late strength in parts of the oil and gas and mining sectors, which perked up on bargain-hunting and firmer commodities prices.

The gold miner Randgold Resources fared the best among the blue-chips, rising 6.37 per cent, or 160p, to 2670p, while BHP Billiton advanced to 1263p, up 1.69 per cent, or 21p. Royal Dutch Shell led the oil issues, gaining 1.58 per cent, or 27p, to 1734p.

Next swung to 1189p, up 1.89 per cent, or 22p, after HSBC moved the stock to "neutral" from "underweight" in a new sector review. The broker also raised its target price to 1170p from 1020p, saying that "as ever with Next, commercial success needs to be evaluated on achieved gross profits and these have held up well".

HSBC expressed less confidence about the wider sector, arguing that the enthusiasm prompted by better-than-feared trading statement was "a little premature" given the uncertain outlook for retailers. In particular, the broker highlighted Kingfisher – down 1.79 per cent, or 2.5p, at 137.5p – which in its opinion had been "dragged up too far".

"The Christmas quarter is traditionally the least important for Kingfisher. The fact that B&Q went on sale early in the UK [Christmas Eve] is of modest import. The fact there have been more cross-store discount weekends in November and December is also not hugely material. What worries us is the deterioration in other markets that we have previously assumed to be less vulnerable," said HSBC, moving the stock to "underweight".

Imperial Tobacco was unsettled, easing to 1860p, down 1.69 per cent, or 32p, after Goldman Sachs moved the stock to "neutral", advising clients to bank profits from recent gains.

"We believe the re-rating provides an opportunity to take profits; the market now appears to have looked beyond the leveraged nature of the group's balance sheet and focused more on the strength of the underlying operations and favourable production positioning in this period of economic uncertainty," the broker said, removing the stock from its widely followed "conviction buy" list.

Elsewhere, Punch Taverns endured another bruising session, slumping to 57.75p, down 12.17 per cent, or 8p, after UBS slashed its target price for the stock to 75p from 160p.

"Whilst we do not envisage the group breaching debt covenants, further deterioration in trade and subsequent cash traps being triggered cannot be ruled out," the broker said. "In addition, regulatory risk remains from the Business &and Enterprise Committee inquiry into pubcos."

The housebuilder Taylor Wimpey was the weakest stock on the FTSE All Share, falling by 24 per cent, or 6p, to 19p after the group's trading statement failed to soothe investor nerves about its debt talks with lenders.

The company offered little detail on the negotiations, leaving analysts to speculate about impact of the eventual refinancing package, with Panmure Gordon reiterating the point that any deal may come "at a high cost to the business, not only in terms of arrangement fees and the margin payment over LIBOR but also in terms of dilution to existing equity shareholders".

Panmure added: "In our view, a dilutive equity fundraising or some kind of debt for equity swap will be required to secure financing terms."

Also on the downside, Real Hotel Group's shares fell by 34.78 per cent, or 1p, to 1.875p before they were suspended. Without elaborating, the company said that it had asked for the suspension pending clarification of its financial position.