Market Report: Sky slips as Footsie eyes record month

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British Sky Broadcasting was hit by profit-taking and regulatory fears as the FTSE 100 moved closer to recording its best monthly performance since April 2003.

Sky was marked down by 11p to 584p after UBS advised investors to bank recent gains, pouring cold water on hopes of a News Corporation bid and warning that Ofcom's upcoming pay-TV market review could hit earnings. The broker said that while the possibility of New Corp assuming full control of Sky could not be ruled out, there were questions about the timing and rationale for such a move. The shares also faced regulatory headwinds, with recent reports suggesting that Ofcom could publish its review as early as today and that pricing for Sky sport and movie offerings to third parties could be cut by 25 per cent, compared to market hopes of 20 per cent.

"This could lead to a 5 per cent downgrade to 2011 earnings per share [forecasts]," the broker said, moving Sky to "neutral". "Stocks often underperform ahead of regulatory catalysts, and then rally once there is visibility," UBS added. "However, [Sky] has rallied on takeover hopes and it may be some time before we know what competitors intended to do and whether [Sky] is successful in any moves to get an injunction or a 'stay' against any cuts."

Royal Bank of Scotland analysts were more positive, saying that there was a good case for Sky to get a stay on pricing. "Premiership football clubs will face hardship – a consideration outside Ofcom's remit," the broker explained, adding that the political window for regulatory action may also have closed as "the Conservative party seems more pro-Sky".

Elsewhere, ITV gained ground, adding 1.9p to 60.6p after Ofcom launched a review of the rules governing TV airtime sales, sparking hopes that broadcasters could be allowed to cut back on adverts, which in turn would boost earnings as airtime prices rise. The stock was also aided by RBS, which said that ITV was "enjoying a stronger trading recovery than we anticipated". "We sense the tide is turning for ITV," the broker said. "The advertising cycle has turned; regulatory relief may be close; and new management is in place."

Overall, the FTSE 100 rose by 7.64 points to 5,710.66, while the FTSE 250 fell back, losing 14.03 points to 10,209.53. The mining sector was strong, with Xstrata rising by 38.5p to 1,231.5p and BHP Billiton adding 30.5p to 2,267.5p, but weakness in the oil and gas sector and among banks – Royal Bank of Scotland was 0.81p behind at 44.78p after Fitch Ratings said any recovery in retail and commercial bank earnings at the major UK banking groups in 2010 was likely to remain fragile – capped blue chip gains. The benchmark index nonetheless remains well-placed to surpass last July's record gains and register its best month since early 2003.

Sentiment was not helped by another warning from the ratings agency Standard & Poor's, which said its outlook on the UK remained negative, with the country's AAA standing at the risk of coming under pressure if a stronger fiscal consolidation plan is not forthcoming after the election. "In our view, the Government's 2010 Budget ... did not include any material new information relating to its medium-term fiscal strategy," S&P said, rattling nerves in the City.

Vodafone was among the strongest, rallying by 4.45p to 151.15p amid hopes that Verizon Wireless, which Vodafone co-owns with the US joint-venture partner Verizon Communications, may begin paying dividends to the UK telecoms group. The company, which is 55 per cent owned by Verizon Communications, has not made a payout since 2005, opting instead to pay down debt. Weekend press reports of talks between Verizon Communications and Vodafone sparked hopes of a change in tack, with Bernstein analysts saying that the news underscored the fact that "the cash distributions from Verizon Wireless are increasingly imminent".

Further afield, the recruitment group Michael Page International fell to 408p, down 7.8p, after RBS turned cautious, switching its stance to "hold" from "buy" on account of the recent rally in the share price. Looking ahead to the company's quarterly update next week, the broker said the statement was unlikely to lead to upgrades. "Our sole 'buy' [rate] stock in the sub-sector is Hays, where consensus is bearish on public sector exposure and dividend sustainability," RBS said. At the close, Hays was broadly unchanged at 108.4p, down 0.4p.

On the upside, the utility support services group Spice, which saw its shares slide last week after saying that pre-tax profits were likely to miss its expectations, bounced back to 29.75p, up 2p, after Liberum Capital weighed in with some words of support. "Since [23 February] 4 out of 9 analysts have downgraded to sell. Spice is now the lowest rated stock in the peer group – historically it has commanded a median rating," the broker said, revising its recommendation to "buy" from "sell". Liberum went on to add that, even on its own below-consensus estimates, Spice, which offers a 5.4 per cent yield, was trading on an undemanding multiple of 4.3 times forecasts for 2010.

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