Market Report: Terror scare boosts stocks in security firms

Defence and security companies saw their shares rise sharply yesterday after fears about global terrorism were brought into focus following the recent parcel bombs scare.

Qinetiq saw the biggest rise in the sector, which investors piled into expecting an increase in demand after two bombs placed in printer cartridges were discovered on Friday in Chicago-bound planes. The defence technology and security firm, whose work includes aviation security, saw its price go up 3.8p to 111.2p.

BAE Systems was also up, rising 8.4p to 353.1p, while Smiths put on 40p to 1,232p after reports that the company has already been approached by the Government. Theresa May, the Home Secretary, has said that security measures will be reviewed, while David Cameron yesterday chaired a meeting of Cobra, the emergency planning committee.

"Given the recent scares surrounding the airline industry, one thing is for sure, calls for increased security measures are going to get louder," said Manoj Ladwa, a senior trader at ETX Capital. "With screening likely to be extended across the cargo industry, demand for products made by the likes of Smiths Group and BAE Systems are likely to see a noticeable pick-up."

On the rest of the top-tier index, data from China showing a rise in manufacturing activity brought cheer to the miners as Xstrata led the way, closing 45p up on 1,254.5p. Overall the FTSE 100 closed up 19.46 at 5,694.62 as traders looked ahead to a busy week that will see the expected announcement of further stimulus measures from the US Federal Reserve and the latest decision on interest rates from the Bank of England.

It is also set to be a big few days for the UK banking sector, with a number of key results to be published, including from RBS and Lloyds Banking Group, who both enjoyed gains. Lloyds, which is believed to be announcing today that it is expecting to make a profit over the year, closed 0.66p up at 69.6p, while RBS – which reports on Friday – rose 0.97p to 45.58p.

Also posting a gain was HSBC, up 6.1p to 655.2p, while Barclays dropped very slightly, down 1.05p to 273.55p. HSBC's figures are out on Friday, and Macquarie said that despite the fact that "consensus estimates for HSBC have steadily improved over the course of the year ... this has yet to be reflected in the stock performance".

The worst hit among the blue-chips was Serco, after the company was forced into an embarrassing backtrack. Reports over the weekend revealed that the outsourcer had asked its major suppliers to pay a "rebate" of 2.5 per cent so that it could meet the savings targets following the Government's spending cuts. Yesterday it apologised and withdrew the request, with Execution Noble saying that "the group's prompt apology should ensure no lasting damage". However, it could not prevent the company plummeting to the bottom of the index, closing 27p down at 587p.

Just above it was Next, as analysts from Liberum picked up on the rising price of cotton and forecast bad news for the company, which releases third-quarter results tomorrow. The broker downgraded the clothing retailers, which fell 46p to 2,239p, to "neutral" and said that its "5-8 per cent guided retail price increase now looks low [and] we are not convinced that the industry is sufficiently disciplined ... to pass on this level of increase".

Melrose Resources endured a disastrous day on the FTSE 250 following the news that Sterling Resourceshad ended a venture with the oil and gas company. Under the deal, Melrose would hold a large stake in two blocks in Romania, but Canadian-based Sterling has now cancelled it. Analysts were not optimistic, with Oriel Securities' Richard Rose describing the deal as "a key part of [Melrose's] forward growth strategy". It closed at 270p, down 54.8p.

The professional staffing sector received a boost after Credit Suisse put out an upbeat note, placing the four companies it examined in the "outperform" category and increasing their target prices by an average of 25 per cent. The broker said that it expected the firms "to rapidly expand their international consultant bases" and added that "despite recent share-price strength, we do not see this reflected in the price". Of the firms, Michael Page was the biggest riser, up 18.6p to 489.8p, while the market was also keen on Hays, up 3.3p to 113.8p.

There was plenty of gossip around Croda International, with rumours of an anticipated bid of £19 a share. However, the chatter did little to move the chemicals company's price, and it made a small gain of 1p to 1,439p.

On the wider market, the music company Chrysalis – whose catalogue includes records by such names as David Bowie and Gnarls Barkley – revealed it was in what it described as "early stage discussions with a number of parties regarding merger opportunities"; its jumped 20.5p to 130.5p.