Market Report: De La Rue banks gains as traders brave risks

De la Rue was among the risers as the market, cheered by some positive Chinese data and new banking capital rules, mounted a rally last night.

The banknote printer has had a torrid time since disclosing quality and production errors in July. The intervening period has also seen the departure of its chief executive James Hussey, who had been with the business for 25 years. While some in City still remain cautious – Evolution Securities, for instance, began coverage with a "neutral" view yesterday, expecting negative sentiment to limit near-term gains in the shares – the analysts at Bank of America Merrill Lynch gave the stock a push with some positive comment, switching their stance to "buy" with a revised 820p target price.

Merrill said that while the nature of De La Rue's business meant that not all the information to do with the problems was at hand, and though further clarity is only likely to be forthcoming with the company's update next month, the share price weakness had opened up a buying opportunity. "Our key assumption is that there is no major client loss. Instead, our estimates assume that its largest client reduces volumes on significantly lower margins," the broker said, noting that while it did not know which customer was affected, reports had been pointing to India, which uses multiple suppliers for its banknote paper.

Evolution, whose analysis also points to the Indian government, was more cautious, saying: "Within our forecasts, we assume the Indian government contract is permanently lost... Therefore, retention of the client would provide a material boost to the financial performance." Traders appeared to be happy with the risk, with De La Rue up nearly 4 per cent or 25.5p to 694.5p last night.

Overall, the benchmark FTSE 100 index swung to its highest level since late April, rallying by more than 1 per cent or 63.89 points to 5,565.53, while the FTSE 250 rose to 10,508.33, up 106.33 points. The gains were down to some upbeat figures on Chinese industrial production, which triggered buying across the mining sector, and well-received banking capital rules, which drove financial stocks.

Lloyds was the strongest of the lenders, adding 1.99p to 77.61p as the market welcomed the new capital norms published by the Basel committee on banking supervision over the weekend. UK banks were seen as well placed to deal with the new rules, which call for a key capital ratio of 4.5 per cent, with a new buffer of 2.5 per cent, taking total capital requirement to 7 per cent. Royal Bank of Scotland and HSBC were also among the risers, adding 1.14p to 49.67p and 16.4p to 677.9p respectively.

In the mining sector, Kazakhmys swung to 1,352p, up 67p, as the Chinese data sparked gains on the commodity markets. The news on industrial production proved potent enough to offset any lingering fears of further monetary tightening, supporting Anglo American, which rose by 81p to 2,587p, Xstrata, which added 34.5p to 1,170p and Antofagasta, which closed at 1,155p, up 35p.

Elsewhere, Prudential touched its highest level since January before closing at 618p, up 18.5p. The strength was pegged on weekend reports of bid interest from a group of Chinese investors who had backed the insurer's unsuccessful bid for AIA. The reports suggested that the investors were only interested in holding on to the company's Asian division, something which sparked questions about the feasibility of selling Prudential's UK and US businesses. Further afield, Clive Cowdery's Resolution vehicle was identified as a potential buyer for the UK arm, limiting gains in the stock, which edged up by 1.1p to 251.9p.

BP, up 4.4p at 416.05p, was in focus after Citigroup analysts, returning from a meeting with incoming chief executive Bob Dudley, revealed that the oil giant believed that claims relating to the Gulf of Mexico spill would probably total less than the $20bn its put into an independent fund.

The chip designer CSR stood out on the FTSE 250, rallying 35.2p to 351p after announcing a share buyback programme worth up to $50m.

"Some of the recent weight on the stock has come from fears of a large legal payout," Jefferies said, pointing to the "still outstanding" patent litigation with Broadcom and CSR's inability "to guide the market (for legal reasons) to how exposed it may be with any eventual settlement". "Share buybacks in the meantime suggest a fair degree of comfort that this can be serviced from excess cash," the broker added, doing its bit to support the mood around the stock.

Rightmove fell back, easing by 5.5p to 734.5p, as traders banked profits from Friday's speculative gains. The property website was driven up following Axel Springer's approach for French peer Seloger.com, with traders buying in on hopes of a similar move around Rightmove. But the optimism faded as Panmure Gordon struck a note of caution.

"At worst, this SeLoger approach will result in short closing on Rightmove (7 per cent short interest at present)," the broker said. "We would not recommend adding to Rightmove positions on this news."