Market update - 2 July

The FTSE 100 was up 78.7 points at 5558.6 at 12.25pm today. The FTSE 250, however, was depressed by heavy losses in the housing sector and lost 100.8 points to 8820.

Marks & Spencer, which published a surprise interim management statement this morning, was the worst performer on the benchmark index, down 18.55 per cent or 59p at 259p. The stock suffered after the company highlighted the bleak state of trading on the high street - the retailer said UK like-for-like sales were down 5.3 per cent in the 13 weeks to 28 June. General merchandise sales were down 6.2 per cent while Food sales slipped by 4.2 per cent in the same period. "We expect market conditions to continue to remain difficult and we are managing our business accordingly," said Sir Stuart Rose, chief executive. Sir Stuart also announced the departure of Seven Esom, director of food, from the company's board.

Reacting to the news, Pali International's Nick Bubb said: "Given the operational gearing of the business, this kind of sales run-rate would knock at least £50m off full-year profits, even though gross margins are OK, so we are coming down from £850m PBT to £800m at best."

Cazenove said the statement "has obvious negative connotations for the mainstream supermarket sector. The unscheduled M&S IMS, focusing on a clear deterioration in the financial performance within its food business, has obvious negative connotations for the mainstream supermarket sector. M&S refers to 'pressures on consumer spending and increased competitor pricing and promotional activity, coupled with changes in consumer buying patterns' as reasons for a 'significantly weaker performance'," the broker said, adding:

"The fact that Esom is leaving suggests that this warning is, at least in part, attributed to internal underperformance by the company and it is undoubtedly the case both that M&S has under-managed its food business in recent years (the focus of the recovery in group earnings under Stuart Rose being firmly on clothing) and has suffered a deterioration in its quality/innovation advantage over the mainstream supermarkets over recent years as the latter have invested heavily in premium lines."

Taylor Wimpey, down 54.17 per cent or 32.5p at 27.5p, dominated the headlines among the mid-caps: the house builder said that it had failed to raise capital to shore up its balance sheet in the face of deteriorating market conditions. The news shocked the market - the company was expected to announce a £500m capital injection from new and existing shareholders. The company also announced the departure of its finance director.

"The statement could not be more grim," said Dresdner Kleinwort. The broker downgraded Taylor Wimpey to "sell" and suspended its target price for the stock. Dresdner added: "We believe there is a very real danger that Britain's biggest house builder by volume faces collapse when covenants are tested in February."

Cazenove also expressed concern. "The failure to raise fresh equity is a blow for both the group and the sector," the broker said, "Trading conditions have deteriorated at an alarming rate and we will be reviewing our profit and dividend estimates across the sector."

Moving up

AstraZeneca gained 118p to 2248p after a US District Court ruled in its favour in a dispute over Seroquel, its schizophrenia drug. The news took the stock to first place on the FTSE 100 leader board.

Oil companies recovered from last night's profit taking as the price of crude remained firm - Tullow Oil was up 38p at 944p and BG gained 11p to 1272p.

Parts of the banking sector recovered and the Royal Bank of Scotland gained 5.5p to 209.5p.

Barclays was also up 10.5p at 292p after Cazenove said that the bank had raised "sufficient capital". Earlier, Citigroup had suggested that Barclays may need an extra £9bn.

"In our view, Barclays has raised sufficient capital to support balance sheet expansion (voluntary and involuntary), whilst maintaining a stable (5.5 per cent) equity tier 1 ratio through a UK economic downturn (though not deep recession)," Cazenove said, adding: "The commitment to a cash dividend is welcome, but the payout ratio will rise to 69 per cent next year, which appears at odds with a growth agenda. Therefore, in our view Barclays has little room for error in executing its strategy, as we doubt the market will welcome declining capital ratios without confidence in the timing of cyclical recovery."

In the mining sector, Vedanta Resources was the strongest and climbed by 67p to 2151p. BHP Billiton was up 58p at 1899p, Rio Tinto added 164p to 5928p and the Eurasian Natural Resources Corporation was up 33p at 1208p.

Moving down

The news from Marks & Spencer depressed the retail sector and Next was down 70.5p at 839p.

A similar story unfolded in the housing sector on the FTSE 250 and Barratt Developments was down 28.63 per cent or 16.25p at 40.5p. Persimmon lost 18.7 per cent or 54.5p to 237p and Bellway was down 12.58 per cent or 52.5p at 364.75p.

Also on the downside, Johnston Press lost almost 7 per cent or 3.25p to 43.5p after Citigroup revised its rating on the stock to "sell" from "hold".