Melrose stands out as volumes surge

The engineering sector was in focus on Thursday, with Melrose stealing the spotlight as volumes in the FTSE 250 company surged.

The buyout specialist, which last year purchased engineer FKI and also owns Dynacast, the maker of handles for Gillette razors, saw 16m shares changes hands. Usually daily volumes barely reach 2m shares. Investec was rumoured to be doing the bulk of the business.

Shares in Melrose rose 3½ to 70p as the bulls said at these levels, they are starting to looking undervalued.

Melrose's gains were in marked contrast to the general engineering sector. Morgan Crucible, which makes carbon and ceramic components ranging from body armour to hip replacements unveiled higher full-year profits but said it expects "2009 to be significantly more challenging than 2008". It was the biggest FTSE 250 faller, tumbling 13¾ to 101¼p.

Close behind it was industrial materials maker Cookson, which last month announced it would raise £240m in a deeply-discounted 12 for 1 rights issue at 10p. The shares slipped 1¾ to 17p.

The steep falls in Morgan Crucible and Cookson shares helped drag the FTSE 250 down 27.91 to 6217.86. The UK stock market lacked any clear direction, with the FTSE 100 continuing to hover close to the 4000 level. As it closed up 11.54 at 4018.37, the Dow Jones was pretty much flat at 7551.

The banks were the biggest gainers. Lloyds Banking Group gained 6 to 56.8p as it brushed off a downgrade from JP Morgan, which slashed its target price from 110p to 67p. It has an underweight rating on the group. The same investment bank also halved its price target on Royal Bank of Scotland to 25p. The shares jumped 3.7 to 21.8p.

There was mounting speculation that Barclays, up 7.8 at 101.1p, is working hard on the sale of subsidiaries to raise capital. Some traders think its asset management arm Barclays Global Investors (BGI) could be sold to a consortium buyer for about £5bn. Others suggested a disposal of its controlling stake in South African high-street bank Absa is a more likely option.

Companies with defensive qualities were in demand, particularly the supermarkets. J Sainsbury perked up 16¼ to 336¾p, WM Morrison was 10½ higher at 273¼p and Tesco put on 9.7 to 352p.

Dealers noted that Russia lawmakers are debating a bill to introduce an anti-tobacco legislation in many of the country's restaurants and bars. Traders speculated that should a ban go through, British American Tobacco could be hit. However, the shares improved 11p to £17.81 as Investec Securities published a buy note on the shares ahead of its full-year results on Thursday.

It said: "Based on our forecasts, we expect the forthcoming results to be well received by the market. Given global economic concerns, the BAT dividend should provide some degree of relative rating ballast."

The insurers continued to be unsettled by concerns that dividend cuts are in the pipeline. Aviva fell 17½ to 286¾p and RSA Insurance weakened 3.6 to 131.9p.

Troubled life assurer Old Mutual posted the biggest loss, crumbling 6 to 41.1p after it was disclosed that fund manager Landsdowne Partners had built a short position in the shares on Wednesday, equating to 0.39pc of the company.

Last year, Old Mutual was the worst-performing insurer in Europe due to problems with its US business, and speculation has mounted it could announce a major shake-up at its full-year results in March. It is thought that a sale of Old Mutual's 53pc stake in South African banking group Nedbank could be on the cards.

Legal & General retreated a further 2.4 to 37.6p. The insurer has been hit by concerns about its bond portfolio and yesterday it cut most of its bonus rates for its 750,000 with-profits policyholders to compensate for "falls in most major investment markets in 2008 and difficult conditions continuing into 2009".

The property sector continued to be in focus with shopping centre operator Liberty International confirming that it was considering a fund raising. The shares lost 15¼ to 350p. Land Securities, Britain's largest real estate company, meanwhile unveiled plans for a deeply discounted £756m rights issue. It dropped 15½ to 552½p.

Cadbury eased 3½ to 516p as some traders speculated recent high cocoa prices could have an impact on the chocolate group's margins.

There were some key standout features in the FTSE 250. Dealers are still optimistic that a cash bid at 61p-a-share could soon be forthcoming for specialist Lloyd's of London insurer Chaucer Holdings. Although former suitor Amlin has previously stated that it is focused on overseas acquisitions, dealers reckon it is still weighing up whether it will make an offer for the group. Cash rich Amlin dropped 4 to 351p while Chaucer jumped 3¾ to 46¾p.

Packaging group DS Smith dropped 5½ to 70½p. It was unsettled by Goldman Sachs downgrading the shares from neutral to sell, saying the ongoing weakness in corrugated packaging demand and pricing in Europe will potential lead to the company under-performing. The investment bank, which also cut its target price to 54.5p from 64.9p, is also worried about the group's dividend and thinks the company is at risk of breaching its debt covenants.

Britain's biggest bookmaker Ladbrokes reported slightly better-than-expected full-year figures, and was rewarded by the shares creeping 2¾ higher to 184½p. The operator of 2,600 betting shops also maintained its final dividend at 9.05p, making a total payment for the year of 14.15p.

The numbers helped boost rival William Hill, causing the bookies to advance 5¾ to 247¼p.