Market Report: Barclays eases as blue-chip rally fades

Barclays lagged behind last night, retreating by 24 per cent amid concern about a possible jump in impairment losses as the macroeconomic situation deteriorates.

Panmure Gordon sparked the worries, saying that growth in the lender's exposure to complex credit products meant that it was at risk of shouldering heavy losses if the level of defaults related to these products rises as the economy sours.

"If corporate defaults jump and structured credits undergo another wave of writedowns, we think the structures of swaps that Barclays [has] put in place to limit losses could buckle – leading to further impairments and/or writedowns," the broker said.

Impairment charges may rise to about £13bn in 2009 and 2010 under such a scenario, according to Panmure, beating the company's estimate of £7-8bn.

"We expect this to push Barclays into major losses in both 2009 and 2010; if Barclays decides not to participate in the Government's asset protection scheme (APS), we see additional capital/dilution risk as well," the broker added, reiterating its "sell" stance on the stock and scaling back its target price to 40p from 55p.

The concerns sent Barclays tumbling 20.8p to 65.5p. Lloyds Banking Group, which was rumoured to be close to sealing a deal on its participation in the APS, was also weak as the market headed south, losing 15.5 per cent, or 7.4p, to 40.3p.

Overall, the FTSE 100 was 3.2 per cent, or 116 points, behind at 3,529.9, while the FTSE 250 fell back below the 6,000-point mark, losing 2.4 per cent, or 148.1 points, to 5,935.3, as investors, disappointed by lack of new economic stimulus measures from the Chinese authorities, took profits in the mining sector and insurance stocks slumped to new lows. Early losses on Wall Street served to hasten the decline in London.

After recent falls, the FTSE 100 is on track to record one of its ten worst weeks on record.

Aviva was the weakest on the benchmark index, sliding by 33.3 per cent, or 95.1p, to 189.9p. The life insurer's full-year results were in line with market expectations, but its decision to maintain a dividend prompted concerns among traders, who asked if the move was wise given fears about capital strength.

Sentiment was also hit by news from Standard & Poor's, the ratings agency which issued a report yesterday saying that the increasingly challenging operating environment for the UK life insurance industry was creating "incremental downward pressure on ratings".

Legal & General, down 28.9 per cent, or 10.8p, at 26.6p, was just behind Aviva, while Prudential lost 20 per cent of its value, or 55.25p, to 221p.

Elsewhere, investors took profits in the mining sector, which was also hit by a Merrill Lynch/Bank of America report. The broker lowered its metals price assumptions, saying that the macro outlook remained "harsh".

"While demand in China may ac-tually be somewhat resilient through this global financial and now econ-omic crisis, we are more cautious on the outlook for the rest of the world, [which accounts for] some 70 per cent of demand for many commodities."

At the close, Vedanta Resources, which was downgraded to "neutral" in the report, was 5.6 per cent, or 31p, weaker at 523p, while Xstrata, the target price for which was cut from 568p to 400p, was almost 12 per cent, or 45.75p, behind at 336.25p. On the upside, parts of the recently underperforming commercial property sector perked up as talk circulated that Hammerson, up 4.4 per cent, or 10p, at 235.25p, was attracting strong shareholder support for its rights issue. Its sector peer British Land, up 4.8 per cent, or 15.75p, at 346.25p, was the best performing blue chip of the session.

RPS, which registered gains of almost 14 per cent in the session before, was up another 3.1 per cent, or 4.7p, at 154.7p after Citigroup switched its stance on the consultants to "hold" from "sell".

Candover Investments, which recently disappointed the market with its results , went the other way, losing 41.8 per cent, or 78.25p, to 108.75p.

Persimmon fell back, losing 8.8 per cent, or 32.5p, to 334.75p, after a dis-appointing report on house prices marked the end of the housing sector rally. Redrow was down 7.6 per cent, or 12.5p, at 150.5p, while Barratt Developments retreated to 82.25p, down 11.8 per cent or 11p.

ITV remained unsettled, losing 6.3 per cent, or 1.5p, to 22p after Goldman Sachs reduced its target for the stock from 24p to 19p, Merrill Lynch re-duced its target to 20p from 30p and Bernstein moved its target to 25p from 32.5p.

Moody's also weighed in, cutting its senior unsecured, corporate family, and probability ratings for the broadcaster.

Among smaller companies, the gold producer Ariana Resources gained 15.3 per cent, or 0.2p, to 1.8p after announcing the commencement of trial production at its Kiziltepe deposit in Turkey.