Market update - 15 July

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The Independent Online

The FTSE 100 was down 139.1 points at 5161.3 at 11.56 am today, bruised by an overnight sell off in Asia and weakness on Wall Street. Fresh figures from the Office of National Statistics, which revealed that consumer price inflation jumped from 3.3 per cent in May to 3.8 per cent in June, also bore on British equities.

Moving up

British Energy was the only stock in positive territory on the FTSE 100, up 1.7 per cent or 12p at 718p, after Morgan Stanley recommended a long British Energy and short Drax trade in a note to clients this morning. Drax was down at 12.5p at 753p.

The broker said although British Energy is still engage in talks about a possible bid, a nuclear power joint venture is the more likely option.



"Given the tension between investors (and BGY) who see high value for the company in the current power market conditions, and utilities (who will have more conservative assumptions), we believe that the JV option is the more likely outcome," said Morgan Stanley, adding:

"Although a good performer year to date following the announcement of talks back in March, BGY shares have moved in line with the sector in the last three months, while the UK power price has increased by 38 per cent. Counter-intuitively, the current talks appear to be acting as a brake on share price performance. Clarity should provide the catalyst, in our view."

Moving down

The banking sector, excited by Santander's move on Alliance & Leicester, came off the rally path as investors worried about the health of the US banking system.

A&L was down 6.49 per cent or 21.75p at 313.25p as analysts played down the prospect of a bidding war for the bank.

"…there is an important issue here which should temper the prospect of a major bidding war. Anybody taking on the A&L balance sheet must do so in recognition of the Treasury portfolio (£5bn excluding FRN's) and the bank's Basel II point-in-time rating philosophy. Our previous work argued that an early 1990s downturn could double RWA, implying a capital deficit over £1bn. Indeed, Santander is taking various measures to improve the balance sheet, costing a total of £1bn (including restructuring), almost the same as the equity offer," said Credit Suisse.



Goldman Sachs, whose analysts removed the stock from their "conviction sell" list, also said that the likelihood of a counter offer "is low".



"We believe the recommendation of the offer by A&L's board reflects the lack of options in terms of raising capital following sharp declines in its share price and the £21 bn of capital raisings among other UK banks.

Potential synergies from the acquisition generate a 19 per cent ROI [return on investment] according to Santander estimates, however these come at the expense of an additional £1 bn of capital. We see the latter reflecting the structural and cyclical issues both A&L and the UK banks are facing. We see little read across to the larger UK banks in terms of valuation as the A&L deal reflects its small size and structural issues. At 1x tangible BV [book value], we believe the risk of a counter-bid is reduced as any counter-bidder would have to pay above BV [book value] and erode their capital base in the process," the broker said.



Barclays lost 5.38 per cent or 14.5p to 255.25p and Lloyds TSB was weaker by 6.46 per cent or 18.25p at 264p.

HBOS, which is nearing the close of its rights issue offer period, was down almost 6 per cent or 16.25p at 255.75p.



The Royal Bank of Scotland was the worst off among the FSTE 100 banks, down 8.28 per cent or 14.4p at 165.6p owing to concern about the sale of the company's insurance assets.

In the wider sector, FTSE 250 Bradford & Bingley was the weakest, down 12.26 per cent or 7p at 46p.



Also on the downside, construction materials group Wolseley was down 17.25p at 283p ahead of its pre-close update, due tomorrow.

"Above all at this stage the share price is likely to remain volatile until WOS resolves its debt covenant worries; if this could be done, perhaps by large property sale and leaseback, or by credibly stating high levels of external interest in buying WOS assets (properties and businesses), we would expect some immediate share price gains, but we do not expect this in the short-term," said Cazenove in a new note to clients this morning.

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