Market update - 8 August

The FTSE 100 was down 3.4 points at 5474.1 and the FTSE 250 was up 80.8 points at 9169.5 at 11.51am this morning. The Royal Bank of Scotland was up 8p at 241p after reporting an interim loss of £691m – the figure, although the second biggest loss in British banking history, was still better than some market predictions of around £1bn.

In response, Citigroup reiterated its buy advice. Pali International also stuck with its advice, maintaining a neutral rating on the stock. Analyst Bruce Packard said: “Initial reaction is that these are better than expected, with a lower loss and higher core tier 1 capital.”

The wider banking sector was mixed – Barclays was down 2.25p at 372.75p but HBOS rose 0.25p to 334.75p. Bradford & Bingley gained 0.5p to 54.75p but Lloyds TSB touched 318p, down 0.75p.

Moving up?

Wolseley continued to draw strength from market speculation that a disposal may be in the offing. The construction materials group, which was up 10.5p at 406.25p, has been pegged to announce the sale of Stock Building Supply, its underperforming US subsidiary.

British Airways was better this morning, up 9p at 264p, after Citigroup increased its target price for the stock to 350p from 300p.

“Unlike Air France- KLM and Lufthansa-Swiss, there are few network overlaps and the networks are complementary. BA offers Iberia a strong global network to [North America], [Middle East] and Asia, a large and loyal customer base, and an entrenched position at London Heathrow. Iberia offers BA the largest Latin American network, growth opportunities, a strong balance sheet, competitive cost base, a strong management team and £120m of slots at Heathrow,” said the broker, adding:

“We estimate that combined revenue could be boosted 1 per cent and non-fuel costs reduced by 3-5 per cent by 2015. We estimate total joint synergies of the order of £200-350m by 2012 and £500- 700m by 2015. A potential [joint-venture] with American Airlines could boost revenue further from 2010. Most cost synergies are likely to come from combining maintenance and back office activities.”

Northern Foods was up 3.25p at 58.5p after Goldman Sachs moved the stock to “buy”.

“The environment for Northern Foods has toughened again recently as the consumer continues to weaken and cost inflation recovery becomes harder. We have updated our numbers and now forecast reduced volumes in the chilled business (-2.1 per cent); a margin squeeze from continued cost inflation; and the pension surplus of £66m eroding completely in 2009, resulting in a reduced level of profitability which we see as sustainable,” said the broker, adding:

“We appreciate that the market will need to adjust to this lower level of profitability – however even on this level of returns - we believe the shares offer value to investors with a longer-term perspective.”

Moving down?

Commodity stocks were weak as the oil price eased again – Tullow Oil was down 20p at 721p and Cairn Energy touched 2669p, down 59p.

Among the miners, Kazakhmys was down 56p at 1278p and Xstrata was down 85p at 3059p.

Lonmin, which is the subject of a 3300p per share bid from Xstrata, was down 17p at 3423p after reports that M&G, the platinum miner’s largest shareholder, had reject the Xstrata’s offer.

Vodafone also weighed on the benchmark index, down 1.6p at 137.75p, after Goldman Sachs removed the stock from its conviction “buy” list.

“Its share price has recovered somewhat since a post 1Q results sell off and now has upside potential to our target price roughly in line with the average of our European telecoms coverage. Since we added Vodafone to our Conviction Buy List on March 11, 2008, the shares are -9.7 per cent vs. -3.4 per cent for the FTSE World Europe index. Over 12 months the shares are -12.6 per cent vs. the FTSE World Europe index -10.2 per cent. Since adding Vodafone to the Buy List on May 9, 2007 the shares are -1.5 per cent vs. the FTSE World Europe Index -13.5 per cent,” said the broker.