Market update - 18 December

The FTSE 100 was up a slight 3.22 points at 4327.41 as volumes remained low at 11:36 am this morning. The FTSE 250 advanced to 6407.14, up 99.47 points.

HSBC was in focus again, falling 6.1 per cent or 41p to 631p after Merrill Lynch reduced its earnings estimates and Cazenove weighed in on market concerns about the bank’s capital base.

In a note to clients this morning, Cazenove analyst Paul Measday said that HSBC’s safe haven status was at risk as other banks bolster their capital ratios and loan impairments rise as the global recession gathers pace. The group is also prone to currency moments, he said, estimating that the strength in the dollar might have reduced the bank’s equity tier 1 ratio by 5 basis points in the second half of this year.

“HSBC now has one of the lowest tier 1 ratios among major banks and its equity ratio is in line with the peer group average, whereas previously it was towards the top end of the range. Uniquely within the peer group, both ratios will decline this year,” Mr Measday said, adding,

“At the current share price, we estimate a 10 per cent placing would add 100 basis points to capital ratios and be accretive to [net tangible asset values]. The risk is that HSBC prevaricates and ultimately raises capital at a lower price and is therefore more dilutive to earnings. Alternatively, we estimate cutting the dividend by 50 per cent would save a cumulative 91 basis points of regulatory capital over the [2009-2011 period].”

Moving up

The mining sector remained firm, with Fresnillo gaining 7.22 per cent or 13.1p to 194.6p and Lonmin climbing to 768p, up 5.42 per cent or 39.5p.

Wood Group was strong, up 4.5 per cent or 8.5p to 207.75p after Morgan Stanley moved the stock to “overweight” from “equal weight”.

“We think the risk-reward trade-off now looks attractive given relatively resilient earnings, a favourable operating and financial risk profile, and a share price that appears to be discounting a structural fall in profit margins to a level below the all-time low achieved in 1999,” the broker said,

“The outlook for the European oil services industry has deteriorated in recent months. However, long-term prospects look healthier given the challenges on the supply side of the oil industry. Against that backdrop, we believe it is worth building/maintaining positions in selected oil service companies.”

Moving down

British Airways was weak, down 1.7p at 170.3p after announcing the end of merger talks with Australia’s Qantas.

Also on the downside, SVG Capital slumped to 134p, down 26.37 per cent or 48p after unveiling a 1-for-1 £200m rights issue at 100p per share.