Market Report: RBS buoyed by 'buy' note and rights issue hopes

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A "buy" note from Citigroup gave strength to Royal Bank of Scotland, which rose by almost 4 per cent yesterday.

The bank was also buoyant on hopes of strong demand for its right issue offer, which is due to close today.

Citi analyst Tom Rayner said that while the group continued to face the challenge of integrating ABN Amro, and navigating the current market turmoil, the sell-off in the company's shares had been overdone.

"There is a price for everything, and we think the aggressive fall in the share price... now looks excessive," he said. "Despite a disappointing level of disclosure post-ABN, we argue [the] tangible book value should prove more resilient at RBS than most of its peers."

RBS climbed 9.5p to 259p, putting it fifth on the FTSE 100 leader board.

The wider sector also rallied as investors returned after days of heavy losses. HBOS was the second-highest riser, adding 17.5p to 358p.

Barclays gained 11p to 363p and the FTSE 250-listed Bradford & Bingley was up 4.5p at 73.25p.

The FTSE 100 rose 25.2 to 5,995.3. The strength among the banks, and in the retail sector, offset weakness among mining stocks, which were hit by a slide in metals prices. Early gains on Wall Street also helped, while the Bank of England's decision to keep interest rates on hold at 5 per cent failed to have much effect.

"The market expected the Bank of England to leave rates unchanged, and the news is already priced in," said Mark Priest, a senior trader at TradIndex, the financial spread betting firm. The FTSE 250 gained 33.3 to 10,010.2 as housebuilders rallied off lows.

On the FTSE 100, Lehman Brothers reiterated its "over-weight" rating on the Argos and Homebase-owner Home Retail Group, which rose 13.5p to 252p, claiming first place on the blue-chip leader board.

"Having reviewed [the company's] annual report, which was released [on Wednesday], we have increased confidence in the financial health of the business," the broker said, maintaining its 360p target price for the stock.

Positive comment failed to lift Imperial Tobacco, the Bristol-based cigarette and cigar manufacturer, which lost 24p to 1,974p. Merrill Lynch added the company to its "Europe 1" list of recommended stocks, saying the recent underperformance in the shares offered a buying opportunity.

The construction services firm Wolseley, on the other hand, managed to stay in the black, gaining 0.5p to 532.5p, despite some negative comment from Goldman Sachs. The broker added the stock to its "sell" list and "conviction sell" list, which kept investors at bay for most of the day. "We expect all of Wolseley's end-markets to deteriorate during FY09...," the broker said.

Goldman added that the company's high levels of debt will compound operational weakness, which means that it "will run very close to its banking covenants".

On the FTSE 250, housebuilding stocks mounted a recovery. The sector was hit by a negative report from Cazenove on Tuesday and by one from UBS the day after, but yesterday an in-line interim management statement from Bellway, which rose 32.5p to 626.5p, helped shore up support for a rally. The update was not positive – it revealed declining volumes and eroding operating margins – but it bore no ugly surprises, and reinforced brokers' views that Bellway remained the best bet in a depressed market.

"[The update] should not say anything, in terms of market commentary, which should surprise. That said, we are moving our forecasts downwards to reflect current conditions. The stock, however, remains our key pick...," said Panmure Gordon.

Panmure kept its "buy" rating on the company's shares, but revised its target price to 840p from 934p. Citigroup and Landsbanki also reiterated their "buy" ratings on the stock.

Taylor Wimpey was the best performer in the sector, gaining 4.75p to 82.75p and claiming third place on the mid-cap index.

Barratt Developments, which suffered the most on Wednesday, rose 5.5p to 149.25p. In addition to the sector-wide rally, the company was helped by news of some stake-building: Phoenix Asset Management increased its holding in Barratt to 7.41 per cent, representing around 25.69 million shares in the company.

Others in the sector were also strong, including Berkeley, which added 37.5p to 818.5p and Bovis Homes, which rose 17p to 405p.

Aga Rangemaster, the company behind the Aga-branded cookers and ovens, lost 3p to 276p after Panmure Gordon downgraded the stock to "sell" from "hold". "Aga's customers are well-heeled, but nonetheless should be noticing the rise in energy bills," the broker said.

On AIM, Polo Resources, the coal, uranium and iron ore exploration and mining group, rose 2.25p to 19.25p. According to traders, the surge was down to some heavy institutional buying.