Market Report: RBS finds support amid talk of hedge fund interest

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Royal Bank of Scotland overcame the banking sector blues yesterday and gained more than 8 per cent after market talk mooted the possibility of stakebuilding by a London-based hedge fund and hinted at an upturn in demand for the company's rights issue, which is due to close this week.

Early rumours suggested Chris Hohn's The Children's Investment Fund (TCI) had picked up a stake in the bank, which launched a £12bn rights issue in April.

Traders, however, played down the speculation and instead pointed to talk of strong demand for the issue, which offers shareholders 11 new RBS shares for every 18 already held at a price of 200p per share.

"There was a lot of bad sentiment last week and people were worried the underwriters would be left with a load of shares on their books," said one trader. "But after Bradford & Bingley's announcement [on Monday], that seems to have disappeared."

RBS closed up 18.75p at 244.75p. Bradford & Bingley recovered slightly, gaining 1.25p to 68.25p, and Lloyds TSB added 11.5p to 388.75p. But Alliance & Leicester, which is pegged to drop out of the FTSE 100 in the upcoming index reshuffle, lost 2.75p to 400.25p, HBOS was down 8.25p at 351.75p and Barclays lost 5.25p to 360.25p.

The FTSE 100 closed up 50.1 at 6,057.7. Leading shares rallied off lows following early strength on Wall Street, where investors were cheered by positive comments from Ben Bernanke, the chairman of the US Federal Reserve. The FTSE 250 gained 58.6 points to 9,986.9.

On the FTSE 100, Eurasian Natural Resources Corporation was depressed following renewed rumours of possible stake-selling by Kazakhmys, which owns 14.6 per cent of the company. Kazakhmys built its stake by exercising an option to acquire shares from Vladimir Kim, its chairman, ahead of ENRC's listing on the London Stock Exchange late last year.

Under the terms of the option agreement, Kazakhmys cannot sell its stake until Friday, when the contractual lock-up period expires. According to last night's rumours, the company is preparing to sell out soon after the date has passed. The talk took ENRC down by 5.33 per cent, or 77p, to 1,367p and the stock closed at first place on the loser board.

Elsewhere, the life insurance group Prudential gained 15.5p to 670.5p after Merrill Lynch added the company to its list of most preferred insurance stocks.

On the FTSE 250, rumours of a management buyout plan failed to rescue Barratt Developments, which shed 11p to 156.5p. Traders dismissed the speculation and, instead, pointed to a note from Cazenove, which sullied the mood in the housebuilding sector.

"Actions speak louder than words, and some actions by UK housing companies are at full volume," Cazenove said. "Taylor Wimpey, for example, has closed a third of its offices. This would appear to show management is not anticipating a short, sharp, shock of credit rationing and confidence loss, but a fundamental reduction in volume levels.

"The UK housing market's hard landing has become harder."

Taylor Wimpey lost 0.25p to 82.25p, Bellway was down 20p at 603p, Bovis Homes lost 1.5p to 411p and Berkeley was down 2.5p at 799.5p.

The directories group Yell was weak, losing 0.5p to 118p, after UBS lowered its target price for the stock to 135p from 150p. The broker, while noting the recent underperformance in the company's stock, reignited concern about Yell's debt-laden balance sheet.

"By halving the dividend, Yell's liquidity is manageable for the next 12 months, but we see a shortfall thereafter as debt repayments start to ratchet up," UBS said, adding that the company may have to remove its dividend completely, contemplate asset sales at depressed valuations or, possibly, consider a rights issue to shore up its finances.

The business-to-business publisher Informa, which gained 17.75p to 386.75p, was boosted by speculation suggesting a management buyout, and by some positive sentiment from JP Morgan, whose analysts initiated coverage on the stock with an "over-weight" rating and a 525p target price.

"We are generally positive on professional and B2B publishing, and neutral on advertising agencies," the broker said.

JP Morgan also initiated coverage on Pearson, which was given an "under-weight" rating with a 675p target price. It rose 7.5p to 672p. United Business Media was given a "neutral" rating with a 650p target price. It rose 1p to 610p.

Partygaming, the online gaming company which was buoyed by rumours of a settlement with the US Department of Justice last week, took first place on the mid-cap loser board, falling 22.5p to 277.5p. A note from Numis, in which the broker said the rumours of an imminent settlement were premature, drove speculative buyers out of the stock.