Market Report: Goldman upgrade sends Friends to high places

Positive comment from Goldman Sachs powered Friends Provident, the life insurer, to gain more than 13 per cent or 10.5p to 90.6p yesterday.

The broker added the stock to its "conviction buy" list in a new sector review, citing "superior value" and "the potential for tangible book value growth through disposals".

Goldman also weighed in on rival insurer Standard Life, which climbed to 1,627p, up 84p. Adding it to the same list, the broker said Standard Life had "ample excess capital and low asset risk," noting: "We find it to have the most attractive risk reward profile of the companies analysed."

Elsewhere, in the banking sector, HBOS was the flavour of the day. The stock advanced by a spectacular 16.86 per cent or 44p to 305p as market rumours mooted the possibility of an approach from BBVA, the Spanish banking group.

The talk remained vague and was soon dismissed by traders who said a major UK acquisition did not chime with the Spanish group's strategy of expanding emerging markets.

A firmer boost came from Goldman Sachs, whose analysts added HBOS to its "conviction buy" list.

"With HBOS trading below all-time historical lows in terms of franchise value despite pricing power being as strong as it has been for a number of years, we believe that HBOS offers compelling risk reward," said the broker.

Goldman added that beside HBOS's interim results next week, which it expects will reassure investors, "commentary from the underwriters of the rights issue that, combined, they hold less than 5 per cent of the company would also potentially provide a positive catalyst [for the stock]".

Traders said that the combination of bid rumours and a positive broker report had caused another round of short closing, which added to the strength in the stock.

In the wider sector, investor sentiment was lifted by the feeling that, following a round of recapitalisations among UK banks and a better than expected second-quarter reporting season on Wall Street, the worst of the banking turmoil was over. The positive mood took Barclays to third place on the FTSE 100, up 11.83 per cent or 37.25p at 352p. Royal Bank of Scotland gained 22.25p to 221.25p and Lloyds TSB climbed 26.5p to 346.5p.

Overall, the banks boosted the FTSE 100 to 5,449.9, up 85.8 points.

The London benchmark was also helped by weakness in the oil price, which Lehman Brothers estimates will slip to $99 per barrel by the first quarter of 2009. The development drove consumer-related stocks, which rallied on hopes that the pressure on discretionary spending may ease in the months ahead, and Next, the high street fashion retail chain, gained 5.14 per cent or 52p to 1064p.

Transport stocks, cheered by the prospect of lower fuel costs, bounced too and Carnival, the cruise operator behind the Cunard Line, sailed to 1,910p, up 5.64 per cent or 102p.

Resource stocks, on the other hand, suffered and Tullow Oil was down 14.5p at 765.5p. Cairn Energy lost 41p to 2,703p and BP slipped 5.75p to 521.75p.

Like the oil and gas stocks, the mining sector was hurt by the commodity price outlook. Lonmin, which was again the focus of bid speculation, was second on the FTSE 100 loser board, down 93p at 2569p. Last night's rumours suggested that the platinum producer might attract a bid from Anglo American, which was down 79p at 2747p.

Like the FTSE 100, the FTSE 250 was also firm last night, up 207.2 points at 9,189.8, as the housebuilders rallied. Traders said the cheer in the banking sector had lifted sentiment among the mid-caps, discounting the impact of a new report evidencing the growing pains in the mortgage market.

"It's the same trend as earlier this week," said one trader. "The mood is positive with the banks and the bears are getting squeezed."

As a result, Barratt Developments climbed to 110p, up 21.21 per cent or 19.25p. Taylor Wimpey gained 14.29 per cent or 6.25p to 50p and Persimmon was up 8.89 per cent or 29p at 355.25p.

On the downside, Inchcape, the independent car retailer, lost 3.75p to 340.5p after Société Générale initiated coverage on the stock with a "sell" rating.

"The management team which joined in 2006 has in our view created a group with a greater risk profile and a weaker balance sheet, making expensive acquisitions in emerging markets and moving from a new cash position of £158m in 2008 to forecast net debt of [about] £400m by end 2008," said the broker, setting a 260p target price for Inchcape stock.

On AIM, ASOS, the online retailer, gained 19.25p to 337p after Evolution Securities initiated coverage on the stock with a "buy" rating. "The story is simple," said the broker.

"Consumers are spending more and more online."