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Market report: Monday close

By Rosamund Urwin
Updated: 05:51 EDT, 23 May 2008

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Royal Bank of Scotland investors may have given their blessing to its rights issue, but their support is yet to be repaid with any good news from its shares.

Rosamund Urwin, Evening Standard

Fears for the performance of RBS's insurance arm, which includes Direct Line and Churchill, have fuelled speculation that it will be unable to raise the £7bn it had hoped from its sale. US investment guru Warren Buffett, tipped as a possible bidder for the division, this afternoon ruled out making an offer.

Meanwhile, concerns that holders of American depositary receipts (ADRs) would be unable to take up their rights in the issue provided a fresh blow to the bank. The shares fell more than 6% but recovered slightly to trade down 10½p at 256p while the nil-paid rights were off 15½p at 52½p.

The latest slump is dire news for Goldman Sachs, UBS and Merrill Lynch, underwriters to the rights issue, who could end up with the bulk of the issue if the stock falls below 200p - the price at which investors are being offered further shares.

Rival financials were also cheaper as investors lost their appetite for the entire banking sector. Bradford & Bingley was the biggest faller in the FTSE 250, tumbling 21p to 112p. HBOS, down 6¾p to 462½p, and Alliance & Leicester, off 10¾p at 430¼p, were also hit.

But miners again kept the Footsie 100 out of the red, providing the top five blue-chip climbers on the back of strong broker support. Vedanta Resources, 219p higher at 2780p, tussled the top spot from rivals this afternoon after Citigroup advised its clients to buy into the stock. The broker also tipped Anglo American, up 140p to 3680p.

Meanwhile, Kazakhmys climbed 110p to 1943p after Credit Suisse increased its target price for from £23 to £27 and raised its rating to outperform. Despite a bid from Eurasian Natural Resources, itself up 91p at 1535p, falling through last week, the broker believes the Kazakh miner remains hugely undervalued as copper prices continue to climb. Platinum producer Lonmin was also on the rise, gaining 146p to 3596p.

The FTSE 100 rose 72.2 points to 6376.5 in thin trading. In New York this afternoon, the Dow Jones Average was 88.42 points ahead at 132,986.8.

British Airways, which last week delivered bumper profits, lost ground as broker sentiment soured against the flag carrier. Deutsche Bank dealt the killer blow, cutting its rating to sell from buy and slashing its target price from 361p to 222¾p.

Deutsche warned clients that BA is losing its profitability advantage over rivals and said it believes the majority of its routes, especially those in Europe and the Far East, are now lossmaking.

The carrier is failing to pass on rising input costs to customers, and Deutsche believes this will hit earnings per share despite cost-cutting measures.

Amid an avalanche of broker notes on the airline, ABN Amro also advised its clients to sell the stock. The shares, which were trading at 450p a year ago, sank a further 10¼p to 222¾p.

Pharmaceuticals giant GlaxoSmith-Klinemoved 14p higher to 1153p after saying it had been granted permission by European medical regulators to market its bird flu vaccine for humans. Prepandrix, which targets the muchfeared H5N1 virus, is the first vaccine to receive a licence for use in preventing a possible pandemic.

Panmure Gordon warned that while governments would come under pressure to stockpile the drug, the product may never be used and therefore revenues could prove unpredictable.

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TOMORROW'S AGENDA

• Chief executive Stuart Rose will face a grilling from investors at Marks and Spencer's annual results. Although he was once heralded as the saviour of the High Street chain, his halo appears to have slipped. M&S sent a chill through the retail sector in January when it reported its worst quarterly performance in two years. Poor figures from rival Next have fuelled concerns about falling consumer confidence. Credit Suisse analyst Tony Shiret recently slashed his profits forecast for the chain, but other analysts remain more optimistic, believing M&S will breach the £1bn mark for the first time since 1998.

• Mitchells and Butlers' first-half results are likely to be overshadowed by the outcome of its strategic review. After failing to agree terms to merge with Punch Taverns, the Harvester and All Bar One owner is expected to say plans to sell a stake to private equity have also been put on the back-burner.

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