Market Report: Lloyds short-sellers get fingers burnt

Hedge funds and short-sellers had to learn not to bank on shares going one way yesterday. A bunch of short-sellers who have been buying up Lloyds Banking Group over the past month were yesterday desperately trying to cover their positions. This followed the confirmation of government plans to privatise the bank sooner rather than later.

Karl Loomes, market analyst at SunGard's Astec Analytics, explained: "Since the start of June, Lloyds has seen the number of shares being borrowed climb around 30 per cent, even as its share price held steady – suggesting those borrowing the stock to sell it short were perhaps somewhat pessimistic."

After news of George Osborne's confirmation of privatisation – the Chancellor said Lloyds is in a "good position" for a sale of the 39 per cent stake within months – there has been a rush of short covering – around 4 per cent of the total Lloyds stock being borrowed, according to SunGard. Mr Loomes said this fact is "helping to squeeze its share price".

There were no risers on the FTSE 100 yesterday but Lloyds Banking Group fell less than 1 per cent – down 0.53p to 61.23p.

The FTSE 100 index staggered back 189.31 points to 6,159.51 – a 2.98 per cent drop – the biggest daily fall since September 2011.

The sell-off came after the US Federal Reserve chairman, Ben Bernanke, hinted that monetary stimulus will be reduced as the US economy is improving.

The fall took the index back to January levels, wiping out much of the gains made so far this year.

Miners were out of favour on concerns of weaker growth in China and a downgrade to neutral from HSBC. Gold miners were hit by a huge fall in the price of the precious metal, which slipped below the $1,300 an ounce mark. Bottom of the pile was the Russian gold producer Polymetal International, down 73.5p to 541p. Randgold Resources plummeted 348p to 4,296p.

All commodity prices took a tumble, but while the rest of the index was nursing significant losses, a fall in oil prices – crude oil was down 2.5 per cent yesterday – was good news for the cruise ships operator Carnival. The shares even made it into positive territory during the day, but closed down 13p to 2,217p. The company has had a stormy two years, with a profit warning following the Costa Concordia disaster in which the ship ran aground off Italy in January last year.

But analysts think a falling oil price will help the struggling group, which will report results next week. Carnival does not hedge against oil-price moves, so a fall is good news.

Jefferies scribblers, who only rate it a hold with a 2,200p price target, admit it "should have benefited from a lower oil price," but said the key to its performance will be next year.

Jefferies said "excluding any further external shocks", its 2013 earnings guidance should be achievable.

The interest in Carnival may hurt some hedge funds as the group has been heavily shorted. The short interest has doubled over the year.

Analysts raised more concerns about competition for the microchips designer Arm Holdings. Worries that it will struggle against a resurgent Intel have been added to by fears of the growth of rival Nvidia. Arm suffered a 36.5p loss to 799p.

There were just a few gainers on the mid-cap index, and top of the table was the fashion group Ted Baker. Its forecast-beating trading update was followed by a 230p rise to 1,700p.

News of spudding – the start of drilling – at a field in Vietnam for the oil group Soco International failed to help it advance, and the shares lost 16p to 356.5p.

Aim-listed Fitbug said it had signed a deal with the US health insurer Aetna for its online personal health services, and it was 0.08p healthier at 1p.

The security expert Falanx listed yesterday and added 0.75p to 13.25p on its first day.

A trading update from the pharmaceutical screening specialist Cyprotex was followed by a 0.62p gain to 4.62p.

Sale of an asthma drug in Italy for Skyepharma puffed up its shares by 2.88p to 56.38p.