Market Report: HSBC rides high on a wave of optimism

Optimism ahead of its full-year results drove HSBC higher as the blue chips changed course and firmed up last night.

The stock rose by 2.5 per cent or 17.2p to 717.8p, with Bank of America Merrill Lynch saying that the figures, which are due next week, could lead to consensus upgrades. The broker expects to hear of $17.2bn in pre-tax profits (before own debt revaluation), against a consensus estimate of $15.2bn. The difference is down to Merrill's bad debt forecast of $25.1bn, which is lower than the market expectations of just above $26bn. "With bad debt trends improving in 2010 versus the second half of 2009, we think the [market estimate] of $21.3bn of bad debts in 2010 is too bearish," the broker said, repeating its "buy" recommendation and 975p target price. "We are 30 per cent above consensus in 2010 and would expect the 2009 figures to drive upgrades."

UBS also weighed in, saying that it too expected reductions in consensus bad debt expectations to lead to upgrades. The view pushed HSBC to the front of the banking pack for a while, but it was later overtaken by Lloyds, which closed with a gain of 3.4 per cent or 1.76p at 53.49p. Standard Chartered was 19p higher at 1557.5p, and Royal Bank of Scotland, which is due to issue its full-year results this morning, edged up by 0.13p to 36.13p. Barclays was less successful, and eased by 1.75p to 310p last night.

Overall, monetary policy was in focus as the chairman of the US Federal Reserve testified before Congress. Though traders expressed nervousness before the appearance, Ben Bernanke's commentary eventually helped the FTSE 100 to close 27.83 points higher at 5342.92, amid relatively thin volumes. The mid-cap FTSE 250 index was less impressed, and lost 28.67 points to 9359.18. The mining sector, broadly weak before the chairman began speaking, also began to change course as the hearing unfolded, with Fresnillo, which touched a session low of 734.8p, closing 5.5p higher at 757p, and Anglo American, which touched a low of 2346.5p, ending 5p ahead at 2385p. Vedanta Resources, down 30p at 2535p, was among those that failed to make it out of the red, though it was better off than its session low of 2502p, down 63p.

Over in the oil & gas sector, leading stocks gained ground, with Royal Dutch Shell adding 20p to 1788p and BG rising by 4p to 1164p, as the oil price firmed up in response to news of an unexpected fall in US crude inventories. Cairn Energy, up 2.2p at 339.2p, was in focus in the exploration and production (E&P) space after Goldman Sachs struck a note of caution. The broker moved the stock to "sell", arguing that the shares were expensive relative to peers. "We believe the market is fully valuing Cairn's exploration portfolio in Greenland, and as a result believe that the risk attached to the stock is disproportionate to the potential reward versus its peer group," Goldman said, revising its target for the stock to 375p from 311.6p.

The broker expressed a preference for FTSE 250-listed E&P Dana Petroleum, which rose by 31p to 1116p. "We believe that at these levels, M&A [mergers and acquisition] speculation should provide a floor to valuation, while the 2010 exploration option is 'free'," Goldman said, moving Dana to "conviction buy" from "neutral", with a revised 1652p target price, compared to 1631p previously. Sector peer Soco International, which is rated "buy" at Goldman Sachs, gained more than 3 per cent or 49p to 1554p.

Elsewhere, the publishing group Pearson was 3.5p ahead at 896.5p after Deutsche Bank upped its target for the stock to 760p from 680p. UBS also weighed in, repeating its "buy" stance on the back of recent results from IDC, the financial market data provider in which Pearson holds a majority stake. "Significant improvements in IDC profitability by 2011 should be helpful for their ongoing strategic review, potentially adding another c.£50m to the valuation of Pearson's stake," UBS said, keeping its target price unchanged at 1050p.

Further afield, Evolution Securities reiterated its "buy" view on Provident Financial, which rose by 6p to 945p as the broker predicted "another solid set of numbers" when the company issues full-year results next week. "With management having played a very measured hand in terms of driving risk adjusted growth through the credit crunch and recession... we expect asset quality to remain stable," the broker said, retaining its 1055p target for the stock.

The data centres specialist Telecity was less successful, easing by 3.1p to 374p despite some supportive comment from Altium, which highlighted the positive read-across from rivals at the recent Data Centre World conference in London. "Meetings with Equinix's head of European operations and Interxion's UK sales manager revealed continued strong customer demand in both the UK and continental Europe, particularly Germany," the broker said, adding: "Demand has been particularly strong from mobile customers struggling to keep up with the pace of growth in mobile internet data, while the increased adoption of cloud computing continues to be a feature."