Market update - 15 December

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The FTSE 100 was up 32.17 points at 4312.52 while the FTSE 250 climbed to 6233.08, up 60.1 points, at 11.49am.

HBOS was the strongest on the benchmark index, up 12.74 per cent or 86.p at 76.1p as it rebounded from Friday’s lows, helped by Sandy Chen, analyst at Panmure Gordon, who said that the lender’s combination with Lloyds TSB, up 3.54 per cent or 4.6p at 134.5p, represented the “best long term value proposition” in the UK banking sector.

“It has the potential to create the dominant banking franchise in the UK underpinned by a major funding cost advantage, it has relatively less exposure to the toxic areas in global banking, and the negative goodwill will prove a useful short term resource in absorbing negative fair value adjustments,” Mr Chen said, adding:

“Lloyds-HBOS will obviously be exposed to the same deteriorating UK macro as all of the other UK banks, but it does have relatively less exposure in the areas about which we are particularly worried, namely, structured credits (leveraged loans/CLOs, synthetic CDOs/CLNs etc). Also, neither Lloyds nor HBOS were active in lending to (or participating in) the fund of funds that are being affected by the alleged $50bn Madoff fraud. Thus, although we remain on the lookout for downside earnings surprises, we see less likelihood with Lloyds-HBOS than with Barclays, Royal Bank of Scotland and HSBC.”

Moving up

A growing consensus suggesting that the OPEC cartel was set to unveil a production cut this week lifted the price of oil, boosting the heavily weighted commodity stocks.

In the mining sector, the Eurasian Natural Resources Corporation was the strongest, gaining 5.5 per cent or 16.5p to 316.5p. Xstrata was up 5.17 per cent or 36.5p at 743p, Vedanta Resources climbed to 706p, up 4.83 per cent or 32.5p, and BHP Billiton was up 4.73 per cent or 57p at 1262p.

In oil & gas, Cairn Energy advanced to 1909p, up 4.6 per cent or 84p.

Moving down

Drax was weak, losing 6.85 per cent or 37p to 503.5p, after Merrill Lynch switched its stance on the stock to “underperform”, saying that European power prices “will remain under downward pressure in 2009, with fuel costs and CO2 [costs] falling, and potentially weaker demand”.

“Lower power prices may lead to some European [power] generators facing a drop in earnings in 2010 compared to consensus expectations of growth. Reduced earnings visibility and the need to maximise liquidity could lead to more modest dividend growth in the next 2-3 years,” the broker added, undermining sentiment around Drax and the wider sector.