Market Report: HSBC leads banks in downward spiral

The banking sector lagged behind as weak sentiment sent leading stocks to the bottom of the Footsie last night.

Persistent speculation about a possible capital raising at HSBC, a "sell" note on Lloyds TSB and a fresh wave of grim economic data undermined investor confidence. Worse-than- expected fourth-quarter losses at US investment bank Morgan Stanley and Deutsche Bank's decision to turn down an opportunity to redeem debt also spooked the market.

HSBC fared the worst, down 6.01 per cent or 43p at 672p, amid worries that it may have to raise as much as $14bn (£9.1bn) to bolster its capital base. Lloyds retreated to 125.2p, down 2.19 per cent or 2.8p, after Deutsche Bank analysts moved the stock to "sell" with an 110p target price from "hold" with an 180p target following HBOS's recent trading update.

The wider sector also fell back as investors digested news that UK jobless claims rose at their fastest pace since 1991 in November and Deutsche Bank made a surprise decision to pay a penalty instead of buying back subordinated bonds worth $1.4bn at the first scheduled call date in January, saying that it was more expensive to pursue the latter option.

The move is at odds with normal market practice as the securities are priced on the assumption that borrowers will redeem debt at the earliest opportunity. Failure to do so creates uncertainty and pushes up the price of debt.

Folkert Jan van Der Veer, analyst at Dresdner Kleinwort, said the decision will make it harder for banks to access the capital markets. "If you upset your providers of capital by not calling that bond, investors will take a different view on you, ask for a higher risk premium or not subscribe to a new deal," he said.

Overall, the FTSE 100 edged up 15.11 points to 4324.19 and the FTSE 250 was up 56.62 points at 6307.67. The benchmark missed out on larger gains as the financial sector offset strength in the heavily weighted mining stocks. With Christmas drawing closer, traders again complained about low volumes and the lack of interesting activity.

The insurance group Admiral was on the back foot, losing 3.17 per cent or 28p to 855p, after UBS moved the stock to "neutral" and MF Global said "sell".

Arguing that the bull case had run its course, MF analyst Peter Eliot said, "Unless investors are always going to remain as risk averse as they are currently, the 'hiding in a safe haven' trade must unwind at some point."

"We see risks to each of Admiral's earnings sources. Its competitive advantages are disappearing."

In the mining and oil and gas sectors, stocks rallied after the Opec oil cartel agreed to make a record 2.2 million barrels per day production cut to balance crude oil supplies with rapidly falling demand.

Among the blue-chip miners, Fresnillo, up almost 8 per cent or 13.4p at 181.5p, and Lonmin, up 6.74 per cent or 46p at 728.5p fared the best, while BP was the strongest out of the oil majors, gaining 2.24 per cent or 11.75p to 535.5p.

Taylor Wimpey firmed up after a leaked email from chief executive Peter Redburn suggested that the housebuilder was making progress in debt talks with lenders. In a message addressed to employees, Mr Redburn said that, given the recent volatility the share price and "more press coverage than if Angelina Jolie gave birth to Siamese twin chimpanzees", he had decided to provide an update on the talks.

"There is still plenty of water to go under the bridge, as there is a formal process to go through that will probably run until the end of February, however, the risks have reduced materially," he wrote, helping the stock climb to 10.5p, up 7.14 per cent or 0.7p.

Kesa Electricals, on the other hand, traded lower, losing almost 6 per cent or 5.25p to 83p after Citigroup moved the stock to "sell" from "hold" following the recent, disappointing interim results. Numis also weighed in, switching its stance to "reduce" from "hold".

Pubs group Marston's trading ex-dividend was the weakest among the mid-caps, losing 10.06 per cent or 13.25p to 118.5p.

Among smaller companies, Innovation Group soared to 6.93p, up 100.87 per cent or 3.48p, after confirming the rejection of an indicative cash offer in the range of 15p to 20p per share among other preliminary approaches. Responding to a story in The Independent, the company said it had been advised that the proposals were not acceptable to the majority of shareholders.

In response, Evolution Securities said that, given the premium offered, the rejection was "bizarre". "We have placed our recommendation and target price under review until we find out more," the broker said.