Market Report: Ocado flavour of the day as merger chat returns

The market's taste for online grocery group Ocado continued unabated yesterday as rumours of a takeover refused to die, although some put the rise down to pressure on the City's short sellers.

The group's rise last week was certainly considered a bear squeeze, with many convinced the trend had extended to yesterday's session. Others put Ocado's performance down to the re-emergence of bid chat, with Morrisons mooted as an interested party. Ocado's shares have rallied since hitting the nadir in October, and yesterday rose as much as 7 per cent. It closed top of the FTSE 350, up 12p at 239p.

On the top tier, Whitbread was in focus after backing from Citi. An upgrade to "buy" was enough to see the hotel group close as the second best performer of the day. The broker said the stock was undervalued, trading at an enterprise value of 6.6 times earnings before interest, taxation, depreciation and amortisation, "compared with a long-term average of 7.5 times". It closed 53p higher at 1,773p.

A sector note from Exane BNP Paribas had investors in Diageo toasting their good health. The drinks giant, whose drops include Guinness and Smirnoff, climbed 17p to 1,221p as the French broker raised its target price by more than a tenth to 1,342p. Diageo was one of several defensive stocks to bolster the blue-chips. Other staples included British American Tobacco, which rose 90.5p to 2373.5p. Big pharma also benefited, with AstraZeneca the top, up 68.50p to 3032p.

Yesterday also saw the cancellation of British Airways' shares on the London Stock Exchange. They were replaced by shares in International Consolidated Airlines Group, ticker IAG, following the UK airline's merger with Iberia. On their first day of trading, the stock rose 2.5p to 285p.

The market had that Monday feeling, with trading subdued in the morning, following apprehension surrounding the forthcoming GDP data. The FTSE 100 flirted with negative territory, before finishing 47.6 points higher at 5,943.8 points.

the banking sector proved a drag on the blue-chips, as the industry digested the speech given by John Vickers, chairman of the Independent Commission on Banking, to the London Business School over the weekend. Even though analysts pointed out that, "the worst case scenario, full break-up, appears to be off the table", the banks tumbled. Gareth Hunt of Investec said the message "was better than some had feared" and he believes the banks will see retail divisions legally separated from investment banking.

Despite this, Lloyds Banking Group fell 2.3p to 65.05p, the worst top-line performer of the day. It was closely followed by Royal Bank of Scotland, which gave up 0.86p to 44.08p. All will be revealed when the full report is published in September. After spending much of the day in the red, Serco Group ended the session flat. The outsourcing company retreated after releasing a statement denying reports that it was set to splash the cash. The group said it was "not in any discussions regarding any major transaction at this time", suggesting it was not close to a $2bn deal for US defence group SRA International.

The biggest fall was on the second tier, at De La Rue. Bidder Oberthur Technologies announced it had walked away from the table after its target rejected a revised offer. The shares plunged 124.5p to 695p after the board turned down the 935p a share bid. Analysts suggested nothing short of £10 a share would have stood a chance.

Premier Foods retreated, despite a move to slash its debt with the sale of Quorn. The group announced its move to sell the meat-free operation for £205m, but investors may have been disappointed with the price after talk of the disposal at £230m last year. Analysts also suggested that meat-free could be a potential growth area of the company. It closed 0.5p down at 21.8p.

United Business Media rose 6.5p to 708.5p after Citi raised the stock from "sell" to a "hold". More interestingly, the analysts suggested it could look to sell off its PRNewswire arm. While the broker admitted UBM had given no indication it was considering such a move, it ran through the reasons why it would make sense. This included the potential £380m for the division that would come in handy if it wanted to continue expanding its events division.

on the growth market, Nighthawk Energy rose 10 per cent, or 1p, to close at 11p. Investors were cock-a-hoop as the group said its Jolly Ranch site in Colorado had 14 times more oil than previously expected. This came as welcome news for a stock that has come under pressure since announcing it was to divest all other interests to concentrate on Jolly Ranch. Also on the up was Netplay TV, which said its full-year trading would be in line with expectations, sending the shares up 0.3p to 6.75p. All Leisure Group was under the cosh, falling 3.5p to 44p, after a disappointing trading statement. The cruise operator slumped to a £2.1m loss in the year to 31 October, from £2.7m in profits the year before.