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Market Report: Nomura recommends shorting Barclays

Nikhil Kumar
Wednesday 04 March 2009 01:00 GMT

Barclays registered another session in the red last night, falling by almost 7 per cent after Nomura advised investors to short the lender's stock.

The broker expressed concern about prospects for the bank's participation in the Government's asset protection scheme, which insures lenders against further losses on toxic assets for a fee. "With the Government pressuring it to join the [scheme], a further equity issue to fund the insurance premium is a genuine concern in our view," Nomura said, reiterating its "underweight" stance on the stock.

Traders said the warning chimed with the general feeling in the market, where investors, rattled by the size of the HSBC rights issue, are increasingly focusing on the need for capital in the wider sector.

The concerns sent Barclays down by 5.9p to 81.8p, its third consecutive session of losses.

Overall, the London market refused to rebound, with the FTSE 100 falling by 3.14 per cent or 113.7 points to 3,512. Taken together with Monday's 5.3 per cent loss, the blue chips as a whole are on track to record one of their worst ever weekly performances. The FTSE 250 proved more resilient, losing 9.7 points to 5,850.7.

Anthony Grech, a market strategist at IG Index, said that although the economy was not going to deteriorate for ever, and while at some point the markets were bound to turn again, "at the moment, there is just no compelling reason for investors to start buying".

"For the FTSE 100, the 3,250/3,300 low from 2003 is still the area that everyone is watching. On current form, we may not have to wait too long to see if this proves to be the line in the sand for the UK index," Mr Grech added.

Besides the negative read-across from early losses on Wall Street, much of the damage last night was down to the heavily weighted commodities stocks, which eased in response to the uncertain demand outlook.

Cairn Energy, the India-focused oil and gas explorer and producer, was among the hardest hit, falling by 7.4 per cent or 141p to 1,757p, while BG lost almost 6 per cent of its value, or 56.5p, to close at 893.5p.

News from BP, which was down 4.3 per cent or 18.2p at 404.5p after scaling back its near-term plans for oil and gas production growth, also bore on sector sentiment.

Elsewhere, Wolseley was 4.3 per cent, or 7.4p, behind at 161p following reports that, after being rumoured to be on the verge of tapping shareholders for cash for months, the construction materials group may finally launch a rights issue as early as tomorrow. Numis Securities said a rights issue without any definite action on the company's troubled US subsidiary, Stock Building Supply, was unlikely to be successful as "stock is bleeding earnings and cash".

The broker added: "The continued erosion of the share price in the absence of management action to date to repair the balance sheet implies that a meaningful rights issue would now require a two-for-one [issue at a 50 per cent discount] to raise £1.1bn."

Numis also weighed in on Cattles, reiterating its "sell" recommendation on the sub-prime lender, which slumped by 40.3 per cent, or 2.1p, to 3.1p after the issuing another profit warning, revealing that an internal audit had uncovered problems in the way it accounts for souring loans, and announcing the suspension of senior staff at Welcome Financial Services pending the outcome of an inquiry.

Keller, the construction services group, was 10.8 per cent or 57p weaker at 470p after Citigroup reduced its target price for the stock to 525p from 580p. "The US fiscal stimulus plan is not expected to have a material impact in 2009," the broker said.

"Keller is not exposed to maintenance work and it is unlikely new build work will start before 2010," Citigroup added. "There are significant opportunities in Saudi Arabia, but contracts are increasingly difficult to close. Crossrail represents an opportunity in the UK, but is unlikely to [bring benefits in] 2009."

On the upside, Ultra Electronics was 3.3 per cent, or 38p, stronger at 1,169p after Deutsche Bank switched its stance on the stock to "hold" from "sell".

Commenting on the company's recent results, the broker said that although 18-20 per cent of group revenues were exposed to economically sensitive markets, "the ongoing good prospects for much of its defence business allied [with] a full-year contribution from recent acquisitions should ensure Ultra can deliver good growth in 2009."

Stocks in the housebuilding sector rallied, with traders attributing the movements to Persimmon's recent successful renegotiation of its borrowing facilities. Persimmon was up 8.1 per cent or 28.2p at 375.5p, while Redrow, which was the focus of stake-building by its founder and former chairman Steve Morgan, surged 11.1 per cent or 15p to 150p.

The smaller housebuilding sector peer Taylor Wimpey was 2.7 per cent or 0.5p stronger at 18.5p.

Among smaller companies, Elixir Petroleum slumped to 1.7p, down 26.3 per cent or 0.6p, after the oil and gas group said that it was going to cancel its listing on London's Alternative Investment Market.

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