Market update - 11 December

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The FTSE 100 was down 171.34 points at 4217.35 while the FTSE 250 fell to 6143.57, down 176.82 points, at 11:52 am this morning.



Markets across Europe tumbled following the collapse of the US auto bailout after Senate Republicans refused to support a bill backed by the Bush White House and Congressional Democrats. The effort stalled over a disagreement about the timing of wage concessions – the Republicans wanted wages for members of the United Autoworkers Union to reach parity with those paid to their counterparts at foreign car manufacturers by the end of 2009 while the Union said it was willing to get there by 2011.



Deutsche Bank said the lack of agreement augured ill for the future for the US auto industry, which is struggling to deal with declining sales.

“We now see a strong probability that US auto sales decline even further as: 1) residual values decline; 2) consumers grow increasingly wary of GM and Chrysler vehicles; 3) third party finance companies become increasingly cautious about lending for purchases of Big Three [Chrysler, GM and Ford] vehicles; 4) captive finance companies are thrust further into financial distress (and in some cases covenant risk); 5) a growing number of dealers close; and 6) unemployment is likely to rise even higher than previously expected,” the broker said, adding:



“At this point, although we believe that there is potential for a reprieve from the US administration (using the TRAP troubled assets law), we anticipate an increasingly difficult operating environment that’s likely to force leveraged automaker and supplier stocks to near bankruptcy levels.”



Moving…



There was little activity on the upside with only a clutch of stocks managing to record gains on the FTSE 100: Shire was the strongest, gaining 2.3 per cent or 21.5p at 957.5p after JP Morgan reiterated its “overweight” rating on the stock, while Experian gained 8.75p to 396p, Capita was up 7.5p at 702.5p, Drax climbed to 551.5p, up 4.5p, and Tullow Oil was up 4.5p at 601p.



Moving down…



HBOS was the weakest on the benchmark index, losing 21.35 per cent or 18.7p to 68.9p, after posting a disappointing trading update.

In response, Panmure Gordon said that the key point was the read-across for the wider sector.

“Normally of course, [the figures] would matter. For HBOS standalone, we had been forecasting £0.5bn in pre-tax losses in 2009/2010; our initial forecast revision points to £2bn in pre-tax losses for 2008 and bigger losses in 2009…,” the broker said,

“But of course, this isn’t a normal day for HBOS shareholders; this is the day they are being asked to vote for the Lloyds-HBOS deal. Given the alternative, we’d obviously advise them to vote for the deal. The bigger point is the read-across. This doesn’t look like a big bath to us; it looks like the acceleration in deteriorating fundamentals driven by the combination of deflation and deleveraging that we have highlighted…”

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