Market Report: Next out of fashion after broker downgrades

A series of downgrades drove investors out of Next, the high-street fashion chain, which was among the weakest performers in a weak market yesterday.

Citigroup, which said the outlook for the UK consumer is "looking pretty dire", moved the stock to "sell" from "buy", while Seymour Pierce switched its stance on the shares to "hold" from "buy".

"The combination of higher UK inflation forecasts, a higher-for-longer interest rate forecast agenda, and deteriorating house market and consumer confidence metrics now drive our household available cash forecasts into negative territory for seven quarters across 2008 and 2009," Citi said. "As a robust lead indicator for non-food sales, this argues for a weak 2008 and 2009."

In addition to Next, which was down 81p at 1,016p, Citi set a "sell" rating on Debenhams, which lost 3.25p to 53.75p, Kesa Electricals, which was trading ex-dividend and was down 19.25p at 170.5p, DSG International, off 8.5p at 49.25p, Kingfisher, 4.2p lower at 124.2p, Signet, which lost 1.25p to 55p, and Sports Direct, 9.25p weaker at 81p.

Home Retail Group, the Argos and Homebase-owner, whose demotion from the FTSE 100 was confirmed after the close last night, was also moved to "sell" and lost 5.5p to 223.75p.

There was no respite for housebuilders and Barratt Developments, which attempted to quell market concern with a statement affirming the guidance given at its 14 May update, sunk further into the red, down almost 21 per cent or 19p at 72.5p.

A note from Merrill Lynch, in which the broker moved the stock to "underperform" from "neutral", contributed to the slide. Merrill analyst Mark Hake said that, given the rate of deterioration in the housing market, the early 1990s slump was becoming increasingly relevant as a comparator. "Note once again the critical importance of unemployment levels as the single most important determinant of consumer confidence and housing transactions," he said. "This was the case in the early 1990s recession."

Merrill also set an "underperform" rating on Bellway, which was down 158p at 448.5p, Redrow, which lost 31.25p to 134.25p, and Galliford Try, which was down 1.5p at 31p.

Berkeley, which lost 47p to 682.5p, was downgraded by Merrill and by Goldman Sachs, which moved the stock to "sell". Goldman pointed out that while Berkeley boasted a number of defensive characteristics, including strong forward selling, low gearing and a high-quality land bank, the company's "focused regional exposure to London and the South-east is a near-term negative".

Of the remaining housebuilders, Taylor Wimpey fell 19.23 per cent or 12.5p to 52.5p and Bovis Homes lost 26.5p to 317p. Persimmon, whose demotion to the FTSE 250 was confirmed last night, lost 11.5p to 376p. Redrow has also been demoted and will lose its place on the FTSE 250 on 23 June.

Overall, weakness among retailers and banks kept the FTSE 100 depressed and the London benchmark lost 104 points, or 1.8 per cent, to 5,723.3. The housebuilders weighed on the FTSE 250, which shed 203.4, or 2.1 per cent, to close at 9,423.1.

On the FTSE 100, HBOS made a statement in an attempt to mollify the market after its share price slipped below the 275p level at which it plans to offer shares under its £4bn rights issue. The announcement said the issue was "proceeding according to plan", and added that current trading and mortgage arrears performance remained in line with its expectations. At the close, HBOS was down 11.64 per cent or 34p at 258p.

The rest of the sector was also hit by a sell-off as investors worried about the economy and the HBOS rights issue. Sentiment was also hit by market rumours, which suggested the Federal Reserve had stepped in to support the Lehman Brothers capital raising. A second rumour, which suggested Goldman Sachs was set to reveal some writedowns, also sullied the mood.

Alliance & Leicester, which will move down to the FTSE 250 on 23 June, lost 29.25p to 318.75p.

Royal Bank of Scotland was 21p weaker at 212.25p and Standard Chartered was down 111p at 1,525p.

On the FTSE 250, the industrial machinery group Rotork bucked the market trend and rose 36p to 1,162p, to second place on the mid-cap index, after UBS hiked its target price for the stock to 1,300p from 1,200p. "Sector-beating returns on capital and above-average margin stability are investment attractions in our view," the broker said.

On AIM, the oil explorer and producer Caspian Energy was down 7 p at 15.5p after a disappointing drilling update. The company said initial test results from the Baktygaryn 703 well in Kazakhstan had revealed no reservoir quality rocks at the target depth. Caspian added that it will continue to drill down to 2,500 metres before making a decision on the well.