Market Report: EasyJet flies high on wind of change in oil price

The budget airline easyJet closed almost 11 per cent higher yesterday after Hurricane Gustav eased, encouraging buyers and spooking short sellers in travel and transport stocks as the price of oil slipped back towards $100 a barrel.

Gustav left US offshore energy facilities in the Gulf of Mexico relatively unscathed, prompting energy traders to bank profits from recent gains in global oil prices, which slipped to four-month lows of around $105 a barrel in afternoon trading.

As a result, easyJet climbed 36.75p to 379.25p, while British Airways, which, like easyJet, has been hit by higher fuel costs in recent months, gained 11.5p to 273.25p.

For both, traders attributed some strength to a round of short covering. According to Data Explorers, 17.84 per cent of BA stock and 13.4 per cent of easyJet stock is out on loan, and last night traders said they expected the number to come down as short sellers abandoned their downside bets.

Short covering was mentioned in the housing sector, which bounced after the Government unveiled a package of measures to revive the ailing housing market. Persimmon, 27.59 per cent of whose shares are out on loan, was the strongest, gaining 10.12 per cent, or 39p, to 424.25p. Taylor Wimpey, which has 15.37 per cent out on loan, was up 8.48 per cent, or 4.75p, at 60.75p; Bovis Homes, with 24.24 per cent out on loan, was up 8.21 per cent, or 37p, at 487.75p.

The excitement in housing stocks was not mirrored in the response of some analysts, however. "The Council of Mortgage Lenders had dismissed the [housing] package as having 'no significant effect on housing transactions'," said Dresdner Kleinwort. "We would remove the word 'significant'."

In the banking sector, HBOS reflected Dresdner's sentiment – despite rising with the rest of the market in early trade, the mortgage lender closed down 7p at 310p.

Overall, the FTSE 100 was up 17.9 points at 5,620.7, while the FTSE 250 gained 134.1 points to 9,543.6, as investors celebrated the oil price weakness by driving up consumer-related stocks.

The cheer was apparent in the retail sector, which looked forward to the loosening of consumers' purse strings as fuel prices ease. The supermarket chain J Sainsbury was among the strongest, up more than 6 per cent, or 21.25p, at 370p as market talk mooted the possibility of a tie-up with Marks & Spencer, which closed up 4.5p at 265p. B&Q-owner Kingfisher, up 5.6p at 140.7p, was also strong.

On the downside, the heavyweight oil and gas and mining sectors were not impressed by the commodity price outlook as market watchers highlighted the prospect of more losses in the days ahead.

David Jones, market strategist at IG Index, said: "The share prices of some of the previous 'safe-havens' – for example BG Group, Anglo American [and] Xstrata – still look vulnerable to possible further weakness and this may well serve to temper the effects of any further recoveries in the previously battered property and financial sectors. With opinion still split on whether there is worse news to come from the major economies, this could well signal choppier trading in the weeks to come, with little overall direction."

At the close, BG was down 3.95 per cent, or 46p, at 1,119p. Anglo American slipped back to 2,646p, down 4.82 per cent or 134p, and Xstrata, which faced fresh resistance in its hostile bid for Lonmin from the company's management yesterday, was down 4.04 per cent, or 118p, at 2,804p.

On the FTSE 250, heavily shorted media stocks rebounded as the market gathered pace and Trinity Mirror – 20.04 per cent of whose market capitalisation is out on loan – was the strongest at third place on the mid-cap leaderboard, up 10.66 per cent, or 11.75p, at 122p.

Pub companies made the most of the better sentiment around consumer stocks after an in-line trading update from Greene King, which was up 9.11 per cent, or 48.5p, at 581p. Mitchells & Butlers, up almost 8 per cent, or 22p, at 303p, and Punch Taverns, up 7.37 per cent, or 21.75p, at 316.75p, were among the prominent risers in the sector last night.

Among smaller companies, market rumours suggested the possibility of stake-building in Pendragon, the automotive retail group which was up 13.33 per cent, or 1.5p, at 12.75p.

Elsewhere, Afren, the Africa-focused oil and gas explorer and producer, fell back under pressure from the oil price despite positive comment from Morgan Stanley, which initiated coverage on the company with an "overweight" rating. "The shares have underperformed recently and the current price offers investors an attractive entry point, in our view, ahead of a pick up in news flow during the second half," the broker said, setting a 160p target price on the stock. At the close, Afren was down 3.5p at 108p.