Market Report: US defence cuts shoot down BAE Systems

The markets were making amends yesterday after a poor recent run, but it was not enough to prevent defence stocks struggling thanks to fears over US government spending.

BAE Systems was just one of 11 fallers on the blue-chip index, as Goldman Sachs warned that the defence market in the States "is deteriorating faster than we expected". The broker's analysts pointed to the proposal from the White House deficit commission calling for defence cuts of $100bn (£64bn) over the next five years.

They also said there was further bad news to come from the withdrawal of troops from Afghanistan, scheduled to begin next July, because it "will put more downward pressure on the US defence budget and, in particular, the US Army investment budget".

Goldman Sachs accordingly repeated its "conviction sell" advice on BAE, which shed 3.2p to 327.1p. However, it did keep Cobham on a "buy" recommendation, and the aerospace electronics company just avoided a fall in its share price, edging 0.1p up to 192.4p.

Overall the FTSE 100 rose 114.23 points to 5,642.5, preventing a fourth day of falls in a row. Although worries over the economic state of the eurozone have not disappeared, manufacturing figures from the UK, US, Europe and China brought some much-needed cheer.

With metal prices rising, one of those to benefit was Xstrata – which made 75p to 1,367p – although it could also thank Barclays Capital for choosing it as one of its top picks. The broker was positive on the miners as a whole, saying that it believed "tighter commodity markets should lead to higher-than-expected commodity prices and better-than-expected earnings growth for the sector". Rio Tinto was another picked out for special praise, and it gained 127.5p to 4,207p.

The banks did their bit, as Royal Bank of Scotland took pole position by closing 2.29p stronger on 39.88p. Lloyds Banking Group, which added 3.64p to 64.05p, was just behind after being talked up by Evolution Securities' head of banks research, Arturo de Frias.

Mr de Frias said he was bullish on the banks because of "fundamentals, not the euro", which he believes are improving, although he added that "being positive on the sector does not mean buying every bank". Luckily for Lloyds it was his "top conviction buy"; his other favourites included HSBC, which advanced 7.9p to 656.2p.

Prudential was also making big gains, after the insurance company said it was aiming for a large increase in its new business profits from Asia by 2013. Panmure Gordon's analyst Barrie Cornes said the new targets were "stretching but achievable and we feel confident that they would not have been released unless management were fairly confident that they are achievable." Investors seemed to agree, as Prudential was lifted 31p to 599p.

On the mid-tier index, De La Rue saw a rise of over 10 per cent as it was boosted up 59p to 637p. The banknote producer has now regained the large losses it suffered last week after it revealed first-half results that showed its pre-tax profits had more than halved.

One of the reasons behind its strong performance was vague reports that the manufacturing buy-out group Melrose – which slumped 3.1p to 290.2p – may be preparing a bid, although traders were sceptical. Also making a contribution was Collins Stewart, which upgraded De La Rue to "buy".

ITE Group topped the FTSE 250's leaderboard, soaring 20.9p to 208p, its highest ever share price. The exhibitions company reaped the benefits of a positive broker response to its full-year results, which were released on Tuesday, in which it said it was seeing a recovery in the Russian market.

Investec, Collins Stewart and Numis Securities all reiterated their "buy" advice on ITE, which increased its dividend to 5.7p, with the latter saying that "it ticks all the right boxes in terms of its geographical exposure, structural security, seasoned management and strong balance sheet."

Not too far behind was Micro Focus, which put on 28p to 359.4p after Jefferies International upgraded it to "hold" as the result of "a period of sustained under-performance". The broker's analysts said that its advice on the company, which releases first-half results next week, "now captures much of the negative news and potential further reduction in guidance".

It was not a happy session for Thomas Cook, with investors running scared after it revealed that its revenue for the year had dropped by 4 per cent, resulting in a drop in profits. The second-biggest tour operator in Europe ended by falling 8.3p to 178p as analysts at Numis predicted a tough year ahead.

Amid the stocks on the Alternative Investment Market, a takeover deal became apparent with the announcement that Clyde Process Solutions is set to be bought by Schenck Process.

An offer of 82.5p a share from the German private equity firm has been recommended by Clyde's board, and the news propelled the Doncaster-based engineering company forward 9p to 81.5p.

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