Market update - 25 July

The FTSE 100 was down 50.8 points at 5311.5 at 12:05 pm this morning after fresh concern about the mortgage market and the health of a leading US bank hit Wall Street overnight. The Dow Jones Industrial Average was badly bruised, down 283.1 at 11349.3 points, after Washington Mutual reported a $3.3bn second quarter loss and analysts said that the unsecured creditors were moving to reduce their exposure to the Seattle, Washington, based lender.

The news unsettled UK financials and Bradford & Bingley was down 7.14 per cent or 4.25p at 55.25p. The Royal Bank of Scotland lost 10.5p to 208.75p. HBOS was 11.5p lower at 290p as analysts expressed scepticism about reports suggesting that JP Morgan was holding talks about forming a consortium to break up the mortgage lender.

“There is little mention of the retail banking operations (34% of profits) & who will own these, beyond an oblique reference to a major Spanish bank,” said Cazenove, adding: “Report suggests that National Australia Bank would be interested in BankWest but also the corporate bank. It is unclear whether this includes the SME business, which would sit more easily with the retail bank given the importance of branches in sourcing deposits. NAB shares have fallen 14 per cent after the company announced a significant CDO write-down (A$830m on an A$1.2bn position)? fundamentals are weak for domestic operations of UK banks & it is far from certain that M&A interest will materialise.”

Beside the banks, insurers were under pressure after Munich Re, the world’s second biggest re-insurer, warned on profits. Hannover Re, Germany’s second biggest re-insurer, also sullied the mood in the sector after expressing caution about meeting full year targets.

As a result, Legal & General was the worst off on the FTSE 100, down 7.28 per cent or 7.7p at 98p. Aviva was 30.5p lower at 481p and RSA Insurance was down 8.6p at 126.7p. Standard Life was also weak, down 12.5p at 215.5p.

Moving up?

Resources stocks dominated the FTSE 100 leader board as commodities prices picked up after recent weakness. BG was the strongest, up 36p at 1104p. Tullow Oil, at second place on the index, was up 16p at 741p.

In the mining sector firmer metals prices took Xstrata to 3257p, up 42p, and BHP Billiton was up 8p at 1548p.

Elsewhere, Johnson Matthey was up 16p at 1699p after Morgan Stanley moved the stock to “equal-weight” from “under-weight”. The broker also increased its target price for the stock, to 1720p from 1670p.

“JM’s share price has fallen 20 per cent in absolute terms, underperforming the European Chemicals sector by 12 per cent. This de-rating was sparked by concerns over a slowdown in global automotive production, fears over a deceleration in diesel penetration rates in Europe, Dow Chemical’s decision to bid for Rohm and Haas and a recent correction in platinum group metal prices,” the broker said, adding:

“Our bull case (2195p) implies upside of 30 per cent, reflecting longer-term upside risk from diesel vehicle adoption within the US market.”

Among the mid-caps, Southern Cross Healthcare gained 1.75p to 119.75p after the company said it had agreed an extension of its current loan facilities until the end of October.

Mecom, the European media group, was the strongest, up 19.48 per cent or 3.75p at 23p following reports that the company had received an offer of around £375m for Edda Media, its Norwegian division.

Moving down?

Rentokil Initial plunged 32.76 per cent or 33.25p to 68.25p after issuing fourth profits warning since December.

Reacting to the news, Panmure Gordon quipped: “Rento Seriously Ill?”

“When a good management meets a bad business it is the reputation of the business which remains intact. Today’s profit warning reflects this saying and is a severe blow to the fan club of the erstwhile ICI management team. The issues are a slowing economy, which the management had alluded to in previous meetings, and integration issues,” the broker said, adding:

“These integration issues have spread to many of the acquisitions made by the previous senior management. We believe the current management team has over a decade of mismanagement to address and, while we feel there are decent underlying businesses in the group, the road to recovery is likely to be much longer than expected.”

Elsewhere, the housing sector remained weak after a new reports revealed the US foreclosure filings were up 121 per cent compared to last year in the second quarter. Bovis Homes was down 7.5 per cent at 27.75p at 342.25p. Barratt Developments lost 6.25p to 96p and Persimmon was down 26p at 322.75p.

The retail sector was also down following further evidence of a slowing economy from the Office for National Statistics, which revealed that UK economy grew by 0.2 per cent in the second quarter.

“On the expenditure side, it is apparent that consumer spending slowed appreciably in the second quarter after surprisingly resilient expansion of 1.1 per cent quarter-on-quarter in the first quarter. Growth in retail sales slowed to 0.6 per cent in the second quarter from 1.7 per cent in the first, while the Bank of England's regional agents have reported that spending on consumer spending slowed sharply in June. In addition, survey evidence suggests that business investment is likely to have been muted in the second quarter,” said Global Insight economist Howard Archer.

The news bore on Marks & Spencer, which was down 14.5p at 245p, and Kingfisher, which lost 7.4p to 116.9p.