Market Report: Man spooked by spectre of regulation

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Man, the London-based hedge fund group, fell back as the FTSE 100 paused for breath last night.

The stock eased after UBS warned of the potential impact on tighter commodities trading regulation on AHL, Man's flagship fund, which the broker said has 30 per cent of its portfolio in commodities. A tougher regulatory regime, such as the one being contemplated by the US Commodity Futures Trading Commission, the American market regulator, may limit price spikes in commodities, which in turn would hit AHL, UBS said, reducing its 2010 (earnings per share) estimate by 16 per cent to reflect the risk.

"Given the strong correlation between recent trends in the oil price and AHL's investment performance, any reduction in price spikes could hit AHL's future performance," the broker explained. "This is a significant potential headwind, as we estimate that AHL generates over 75 per cent of Man's [profit before tax]."

The assessment undermined sentiment around the stock, which was 3.7 per cent or 10.5p lower at 276.75p.

Overall, the FTSE 100 fell back to 4608.36, down 23.25 points, while the FTSE 250 closed slightly higher, rising by 65.33 points to 7999.96. Both fell short of key barriers, with the benchmark closing clear of its January high of 4638.92, while the mid-cap index failed to stay above the 8,000 point mark. Anthony Grech, market strategist at the City spreadbetter IG Index, said the pullback on the FTSE 100 wasn't a surprise given the strong gains on the day before. "There has always been a concern whenever we have seen strong stock market rallies this year that investors were getting ahead of themselves," he said.

British Airways was the best-performing blue chip of the day, rising by 6 per cent or 8.1p to 142.4p, after posting quarterly results. The airline revealed a slide in revenues, but its numbers came in better than peers Air France-KLM and Lufthansa, which published updates earlier in the week.

Elsewhere, energy stocks underperformed as oil prices eased in the afternoon. BG, which retreated to 999p, down 4.5 per cent or 47p, was the weakest, while Royal Dutch Shell, which was downgraded to "underperform" from "in-line" at Cazenove, fell to 1572p, down 1.8 per cent or 28p.

Over in the banking sector, the picture was quiet as the market looked ahead to the string of updates due next week. Traders highlighted a new Credit Suisse circular, which questioned the recent strength in parts of the sector. "The partly state-owned banks [Lloyds and Royal Bank of Scotland] have rallied in recent weeks, reflecting previous underperformance and optimism on long-term earnings. We remain very cautious in this regard," the broker said, adding that its big concern was margins, where it saw scope for a "big negative surprise, particularly in the second half of the year".

"While new asset margins have widened, what is important is the yield on stock. We suspect this is improving only slowly. Indeed, mortgage securitisation trusts show an improvement in yield, net of swaps, of just 10-15 basis points so far this year, and while this is likely to underplay the improvement, we expect an increase of only 30-40 basis points," Credit Suisse said. At the close, Lloyds was 0.12p ahead at 85p, while RBS closed 0.135p stronger at 44.845p. In the wider sector, HSBC was 9.75p ahead at 605.75p, while Barclays eased by 2.7p to 302.3p. Standard Chartered gained 14p to 1421p.

On the second tier, PV Crystalox Solar, the silicon wafer manufacturer, was broadly unchanged at 81.5p, up 0.5p, after Goldman Sachs removed the stock from its widely followed "conviction buy" list. Keeping the stock at "buy", the broker attributed its change to oversupply in the solar market.

"Reduced demand, owing to a lack of financing for highly geared solar projects, combined with new capacity coming on stream, has led to a significant oversupply situation. Competition for these reduced volumes has intensified, with lower-cost Asian manufacturers having a cost advantage that they are using to undercut European competitors," it said, and added that it was leading to more significant price declines that it had expected.

Logica, which was lifted by a Panmure Gordon "buy" note in the session before, drew steam from another upgrade last night, rising more than 8 per cent or 7.75p to 101.25p after Bank of America-Merrill Lynch switched its stance to "buy" from "underperform".

"Consensus is still looking at declining revenues and margin pressure in 2010. With more signs of a stabilisation in the environment this scenario looks increasingly unlikely," the broker said, amending its 2010 numbers to reflect a modest recovery.

"Our sensitivity analysis indicates that the shares have good upside potential in a recovery as [earnings per share] numbers move significantly with IT spending improvements, especially given Logica's financial gearing," Merrill added.

Also on the upside, CSR climbed to 427p, up 3.2 per cent or 13.25p, thanks to a series of upgrades. Credit Suisse moved its target price for the stock to 450p from 390p, while Citigroup raised its target to 500p from 450p. JP Morgan also weighed in, upgrading CSR to "overweight" from "neutral".