Market Report: Fears over trading update put easyJet into a spin

easyJet closed in negative territory for the fifth consecutive session yesterday as hedge funds were reported to be taking large short positions in the stock in advance of next week's trading update from the budget airline. Hedge funds are clearly hoping that easyJet, down 6.75p to 203.25p, will issue a warning on profits.

easyJet closed in negative territory for the fifth consecutive session yesterday as hedge funds were reported to be taking large short positions in the stock in advance of next week's trading update from the budget airline. Hedge funds are clearly hoping that easyJet, down 6.75p to 203.25p, will issue a warning on profits.

Taking a short position in a stock sees an investor sell shares in a company he does not own with the aim of eventually buying them back at a lower price. The difference the investor keeps as profit. Should Tuesday's trading update from easyJet contain a profits alert its shares will drop sharply and leave those hedge funds short to pocket handsome profits.

Since the start of the week hedge funds have knocked 10 per cent off the value of the airline. But how likely is a profits warning from easyJet? According to analysts, there certainly has been no drop in passenger numbers in the industry so if anything is going to cause a setback at the group it is the price of oil. Airlines, particularly budget carriers, are very exposed to fluctuations in the price of crude and the recent soaraway price is likely to have pushed up costs at easyJet by some way.

Dealers also reported vague suggestions that Icelandair, which has a 10 per cent stake in the carrier, may be tempted to offload some of its holding. But although Icelandair is sitting on an impressive paper profit since it started buying easyJet stock last year, analysts believe the group is a long-term investor in the company and so unlikely to be tempted to lock in gains at this early stage.

In the FTSE 100, which finished 1.2 points higher at 4,923.3, GlaxoSmithKline dropped 23p to 1,224p on fears that the pharmaceuticals giant could face a sizeable fine from the US Food and Drug Administration over the production problems at its manufacturing plant in Puerto Rico. Nomura Securities pointed out that in 2002, Schering Plough, GSK's American rival, was forced to pay a record fine of $500m to the US Treasury after suffering a similar mishap. It suggests GSK could face a fine of up to $1.4bn.

BAE Systems rose 5.25p to 262p, in brisk trading, amid vague rumours that yet more corporate action could be on the cards at the defence giant. At the start of the month, BAE unveiled the takeover of United Defence Industries, a US rival, in a deal worth £2bn. Wolseley added 15p to 1,095p as traders piled into the building materials group before its first-half results next week. Those who were buying into Wolseley yesterday bet that the figures will not disappoint. Analysts expect the group to deliver a 25 per cent rise in pre-tax profits to £308m.

Merrill Lynch turned more cautious on Rentokil Initial, sending the stock 2p lower to 160.75p. The US broker cut back its rating to "neutral" from "buy" on valuation. Merrill believes that Doug Flynn, Rentokil's new chief executive, will find himself under increasing pressure to make major strategic changes at the group and that this will probably result in significant asset disposals. It suggests that Mr Flynn will probably try to sell the group's conferencing and parcels division, which is likely to fetch up to £680m.

Cookson continued its week-long march higher, gaining a further 1.25p to 40.75p. Momentum traders believe the stock should hit 43p next week.

Trafficmaster dropped 3.5p to 57.75p after Ian Williams, a non-executive director, sold 1.2 million shares at 56p. This week, the car positioning specialist unveiled a sharp jump in profits but yesterday investors were unsettled by the director share sale. Over the past 12 months the group's management have been heavy sellers of stock and have netted over £1.5m from share disposals.

James Fisher & Sons rose 2.5p to an all-time high of 329.5p on news of a £12m acquisition by the marine services group. Word has it a series of broker upgrades on James Fisher are likely next week.

Gaming Corp added 1.5p to 15.5p on whispers that the online gaming group may be close to a deal with Orange which will see it branch out into the mobile phone arena. Dealers reported heavy demand for Envesta Telecom, up 0.15p to 5.87p. The group will post interim results on Wednesday and, if you believe yesterday's market gossip, they are likely to impress investors in a big way.

Savills dropped 9p to 618p after Rupert Sebag-Montefiore, an executive at the upmarket estate agency, sold 24,000 shares at 620p. Even after yesterday's fall, Savills stock remains close to its all-time high. Finally, brokers predicted that Enola Resources should have a strong debut on Monday. The soon to be AIM listed group has raised £500,000 and plans to use the cash to acquire mining assets in Africa.