Market Report: Morgan Stanley adds to retailers' VAT problems

Retailers reacted with dismay to the VAT increase announced by the Chancellor's in Tuesday's emergency Budget. They felt further pain on the market yesterday as Morgan Stanley said investors should head for the exits.

The broker's analyst, Graham Secker, said that because the tax was going up to 20 per cent, "our preferred trade is to sell general retailers and buy food retailers, as consumers have less discretionary income going forward".

General retailers had outperformed food stores when VAT was slashed to 15 per cent, Mr Secker added. As Morgan Stanley introduced a swath of ratings cuts, Halfords Group was among the worst affected, with its shares falling 21p to 525p.

Yesterday on the top tier was, in the words of one trader, "all about BP". The creaking oil giant was in focus again as fears intensified about the size of the bills waiting for it as it tackles its oil spill in the Gulf of Mexico. Analysts at Nomura said in a note: "Perception of near-term credit risk is highly damaging for BP, likely leading to constraints around counterparty trading, the attractive roll of drawn commercial paper and the ability to dispose of assets at attractive prices."

BP's shares hit a 14-year low by mid-morning and, despite a slight rally, closed 20.6p lower at 304.6p. It dragged down the entire FTSE 100, which closed 53.7 points lower at 5,046.4, the fourth consecutive day of falls.

Miners also retreated amid fears about the global economic recovery. The worst hit was Kazakhmys, which lost 43p to close at 1,067p.

Beyond BP, one market participant said the banks were holding steady. "Really though, volumes have been terribly subdued." Standard Chartered was the standout performer in the sector, rising 31.5p to 1742p. "The banks trade like water at the moment," the trader said. "Their valuation is pretty lowly and they are a good way of making money if you get it right. You'll lose a lot if you get it wrong, though."

The rise of the banks was also supported by news that the Basel III capital requirements would not be as tough as was previously feared. The regulation requires financial institutions to increase the amount of money they keep to cover potential crises. The Basel committee is presenting its latest proposals in a paper to the G20 summit in Toronto this weekend.

The mobile phone company Vodafone added 1.15p to close at 144.05p following a note from Morten Singleton, of Collins Stewart, who said that while the stock was not far off its fair value, current and pending newsflow "should see the share price ride beyond fair value levels". He was driven to raise the stock to a "trading buy" by news about data pricing and net neutrality, and duly upped its target price to 160p.

Late in the day on the second tier, shares in the housing maintenance contractor Connaught plummeted after it issued a profits warning 20 minutes before the close. The shares still plunged by a third, closing 105.2p lower at 215p after it said it was hit by government spending cuts and contract deferrals.

The chip designer Imagination Technologies stumbled after brokers gave it a collective working over. Jeffries and Panmure Gordon downgraded the stock from "buy" to "hold", while Seymour Pierce went one further and cut its rating to "sell". Seymour's Ian Robertson said: "We may be lacking a distinct catalyst to share price underperformance but the value of the graphics is more than priced in, and there is no real evidence of any other value."

It was all "lights, camera, action" for Cineworld Group. The only UK-listed cinema chain won the contract to run the cinema at London's O2 arena from its rival Vue. Cineworld signed a 25-year deal with the owner of the venue, Anschutz Entertainment Group, to operate the 11-screen multiplex.

Steve Wiener, the chief executive of Cineworld, was delighted by the win, saying the former Millennium Dome was a "landmark destination". The shares rose 3p to 200p at the news.

The share price of the car rental agency Avis Europe careered off the road. The stock gave up 17.9 per cent and closed at 28.5p after the company said it hoped raise £151m from a rights issue. Avis said it had turned to investors for cash – at a heavy 56.8 per cent discount to Thursday's closing price – in an attempt to bolster its balance sheet and give it "sufficient financial flexibility" to meet investment needs and provide for a loan maturing next year.

The Belgian car distributor D'leteren, which owns 59 per cent of Avis, fully backs the move, and the latter has also agreed a refinancing deal with its banks. One analyst said: "The appetite for small caps is weak; they are seen as highly risky at the moment. The market believes that lots of the companies will need to raise cash over the next year, and many will struggle to pull that off."

Devro enjoyed a rise in fortunes after a pre-close trading update. The company, which makes sausage skins (although it refers to itself as a "manufacturer of collagen products") said sales, pricing, volume growth and manufacturing efficiency had driven a "stronger than anticipated finish to the first half". On a weekend that is likely to see a spike in demand for sausages, Devro's shares rose 0.75p to 190.5p.

FTSE 100 Risers

Randgold Resources 6,480p (up 80p, 1.25 per cent)

One of the few mining stocks to rise as the price of gold soared yesterday.

British American Tobacco 2,129p (up 11p, 0.52 per cent)

As the markets fell further, investors looked towards classic defensives for safety.

Shire 1,416p (up 3p, 0.21 per cent)

Pharmaceutical company rises after approval of treatment for Gaucher disease is recommended.

FTSE 100 Fallers

Filtrona 213.6p (up 4p, 1.9 per cent)

Cigarette filter maker ends volatile week on the rise, as investors return following previous day's losses.

Dana Petroleum 1177p (up 11p, 0.94 per cent)

Stock makes slight gains after disappointing news of a key well the day before had sent it tumbling.

Cranswick 844p (up 6p, 0.72 per cent)

Bargain hunters pile in as stock had dropped to month lows with prospect of big barbeque weekend.

FTSE 250 Riser

Eurasian Natural Resources Corporation 930.5p (down 36.5p, 3.7 per cent)

Among hardest hit miners, as fears increase over global recovery.

Home Retail Group 225.9p (down 16p, 2.93 per cent)

Morgan Stanley note on general retailers drags stock lower.

Bunzl 689.5p (down 12p, 1.71 per cent)

Company's stock suffers fourth consecutive decline, following results earlier in the week.

FTSE 250 Fallers

Game Group 69.15p (down 3.95p, 5.4 per cent)

Video game retailer suffers as broker Goldman Sachs reduces price target.

ITV 53.5p (down 1.8p, 3.25 per cent)

Morgan Stanley reduces public service broadcaster's rating from "overweight" to "equal-weight".

nGo-Ahead Group 1167p (down 33p, 2.75 per cent)

Transport company suffers price target cut from Morgan Stanley analysts.