Market Report: Kaupthing's positions keep traders busy

It was a savage day in London, with the market swings leaving traders with whiplash as they tried to digest the emergency bank bailout and the interest rate cut. When the dust had settled, it was clear that fear was still stalking the market as it finished down 5 per cent.

Beyond that, the topics of conversation keeping everyone busy were Robert Tchenguiz's stake in J Sainsbury and the effect of the collapse of Kaupthing's UK arm on the market.

It emerged in the morning papers that Mr Tchenguiz had sold his 25 per cent stake in the pub group Mitchells & Butlers to Joe Lewis. Shortly after, his broker Kaupthing placed 168 million shares in Sainsbury's at the heavily discounted price of 250p.

Yet the high street chain had put out very encouraging numbers yesterday morning, with sales in the second quarter up 4.3 per cent, ahead of analyst expectation, and was upbeat about Christmas. Then things got interesting, as Kaupthing's UK business was put into administration, throwing the share sale into doubt. Rumours were that administrator Ernst & Young was still keen to push through the stock sale, but it was not enough to prevent the supermarket's shares plunging to the bottom of the blue-chip leaderboard. It lost 14.9 per cent to close at 267.75p.

Traders predicted that as Kaupthing unwound its positions, some stocks could swing wildly. It also has 30 per cent of sportswear retailer JJB Sports through indirect holdings. JJB has already had a tough week after losing a credit insurer; it plunged a further 36.8 per cent to 12p yesterday.

Another trader suggested the unwinding of a short position might have been responsible for the jump in Trinity Mirror's share price, as it rose 12.45 per cent to 74.5p. So the Government waded in with its £50bn bailout to try to salvage the UK banking system as we know it, and it had an immediate effect. The market dropped 4 per cent.

The banks benefited, with HBOS storming back up. The group was up 46 per cent at one stage, although it eventually closed up 24.5 per cent at 117p. Collins Stewart said: "HBOS has most to gain from such funding guarantees and is cheapest."

Another of the stocks to have been targeted by the bears, Royal Bank of Scotland, rose 0.78 per cent to 90.70p. Those trading the sector switched out of Standard Chartered, the only bank to take a real hit, slumping 11.52 per cent to 1,160p. Then, at lunchtime, the Monetary Policy Committee announced it had cut interest rates by 0.5 percentage points, which brought the top tier storming back into positive territory.

Retailers benefited from the positive sentiment, with Marks & Spencer and Next looking strong, before the afternoon plunge wiped them out. The FTSE 100 finished the day down 238.53 points at 4,366.69 as the fear returned.

One shell-shocked trader said the markets had been ridiculously volatile, adding: "I've never seen anything like this in all my career; this was just a mad, mad day. The market is worried that the measures aren't enough."

The London Stock Exchange was among the worst fallers, giving up 12.5 per cent to 712.5p. The slump was triggered by Mamoun Tazi of MF Global, who slashed its rating to a sell. "We believe the threat from competition is not priced in and that, combined with lower volumes, this will drive earnings down 42 per cent in the next three years," he said.

Worst loser on the second string was Aricom, the iron group, after it said it needed to raise $1bn for two projects in Russia. This led to fear over where such funding could be raised with the markets in their current state, and the company failed to provide much clarity. It closed down 13.2 per cent to 14.75p.

The second line housebuilders benefited from the interest rate cut. Bellway was the strongest, up 11.7 per cent to 540p, followed by Bovis Homes, up almost 8.1 per cent to 399.25p.

In the wider markets, Uniq plunged 42.2 per cent to 44.5p. The collapse came after the sandwich maker for clients including Marks & Spencer issued a profit warning. The group said the further deterioration in economic conditions meant its posh sandwiches were not getting shifted as customers were targeting discount brands as their belts tightened.

On AIM, Zenith Hygiene raged 63 per cent higher as it revealed it had been approached by an unnamed suitor. The shares rose to 10p after the group confirmed the offer, adding it would be no more than 12p per share.

Elsewhere, positive news from Georgia had Frontera Resources climbing 14.8 per cent to 35.0p. The group said flow rates from its Mtsare Khevi field were better than expected, and said there were 40 additional drilling locations planned.

On the downside, Bluewater Bio International halved after it announced its intention to delist from AIM. It closed at 3.5p.