Market Update: Market in better shape after AIG rescue

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The FTSE 100 was up 58.6 points at 5084.2 and the FTSE 250 was up 87.8 points at 8496.9 at 11:58 am this morning.

The market was in better shape than recent days following the overnight rescue of AIG, once the largest insurance group in the world, and news of merger talks between Lloyds TSB, which was up 42.5p at 322.25p, and HBOS, which fell more than 50 per cent before recovering to 179p, down 3p, on the news.

"A possible combination of HBOS and Lloyds is good news - there has been a lot of uncertainty around HBOS and this should put a floor under the stock," said one market source. "Consolidation is the key to survive in these markets - we saw it with Merrill and Bank of America and now we are seeing it here."

Cazenove also weighed in, highlighting the "potentially profound" implications for the UK life insurance market if the merger succeeds.

"In 2006 (the last year for which consistent market share data is available) Lloyds TSB (Scottish Widows etc) had [a] UK life [insurance] market share of 7 per cent, [and] HBOS (Clerical Medical, Halifax Life, SJP) had 10 per cent. The pro forma life businesses, if merged, would comfortably be the number 1 UK life player with a market share of 17 per cent, leaving current leaders Aviva, Standard Life and Legal & General (all 10-12 per cent) trailing in its wake," the broker said, adding: "Although we are running several steps ahead of events (i.e. assuming Lloyds/HBOS closes and that the life companies are integrated) the triggering of overdue industry consolidation by Lloyds/HBOS could unlock significant shareholder value."

Moving up...

In the wider banking sector, Barclays was up more than 10 per cent or 33p at 341p after confirming an agreement to acquire Lehman Brothers' North American investment banking and capital markets businesses.

Reacting to the news, Cazenove said that the move will give Barclays a top 3 position in US capital markets. The broker said: "In our view this acquisition has the potential to be transformational for Barclays. The risks of the transaction are substantially lower than if an entire business had been acquired. The primary challenge is for the group to generate sufficient capital to fund the ongoing and now larger capital commitments with this acquisition."

Elsewhere, mining issues rebounded from recent lows and Lonmin, which is the subject of a 3300p per share hostile offer from Xstrata, was up 124p at 2666p. Rio Tinto climbed to 4062, up 190p, and Vedanta Resources gained 33p to 1432p.

Moving down..., trading ex-dividend, was down 9.21 per cent or 5.5p at 54.25p.

Bad broker comment weighed on distributor Electrocomponents, which was down 4.75p at 166.75p after UBS switched its stance on the stock to "sell" from "neutral". "The UK accounted for 50 per cent of group EBITDA [earnings before interest, tax, depreciation and amortisation] in [2008]... UK sales trends have correlated strongly with manufacturing outlook and we see no reason why this should be any different going forward which, given weakening trends in the latter, increases our caution," the broker said.