SHORT-TERM investors chased HBOS on hopes that this month’s trading update from the £36 billion mortgage lender will reassure.

The Edinburgh-based bank, whose offshoots include Clerical Medical and Birmingham Midshires, will issue a pre-close trading update on June 21 ahead of the release of its first-half figures in August.

On the basis of HBOS’s recent mortgage securitisation data, which showed some slowing of a deterioration in arrears at three months and beyond, Credit Suisse thinks the statement should comfort investors.

Jonathan Pierce, analyst, points out that HBOS has underperformed Lloyds TSB, up 2½p at 523½p, by 12 per cent so far this year, and trades at a 10 per cent discount to its rival in terms of foward earnings multiples, despite offering higher earnings growth based on Credit Suisse’s forecasts for 2007. On the view the shares could appreciate 10 per cent, the Swiss bank flashed out a trading alert moving HBOS from neutral to buy. HBOS gained 29p at 965p.

Banking stocks also found support from Merrill Lynch, which upgraded the European sector from underweight to neutral on valuation grounds following recent weakness. Among the smaller UK banks, it singled out Northern Rock, up 37p at £10.05, where it has a £12.50 target, and which it considers undervalued given the prospect of 15 per cent growth in earnings per share.

Thursday’s after-hours bounce on Wall Street made for a strong start in London, which persisted to a 92.3 advance for the FTSE 100 at 5,655.2 at the close. Natural resources stocks once again proved influential, helped by bullish noises on miners from Merrill, which flagged recent weakness as a buying opportunity. But it was Cable & Wireless, up 6½p at 113p, which took the best blue-chip slot amid heavy volume in 93 million shares. Analysts cited relief at Thursday’s decision by the telecoms operator to stop throwing cash at its Bulldog broadband operation and an upgrade from Lehman Brothers from “underweight” to “equal-weight”.

Sage Group advanced 10½p at 224p on repeated “buy” advice from Dresdner Kleinwort Wasserstein. The broker is encouraged by feedback from Intuit, the software house’s US rival, which saw 40 per cent growth in its merchant services division in 2006. Dresdner expects Sage to benefit from the same trend through its Verus division and considers the 23 per cent fall in the shares since first-half figures as undeserved.

Smiths Group put on 11½p at 854½p as ABN Amro moved from “sell” to “hold” after the fall in the shares of the medical and aerospace systems maker from £10 over the past month. The Dutch broker notes Smiths offers a prospective dividend yield of 3.6 per cent for the year to July 31, and suggests the company is capable of maintaining a progressive dividend policy.

Gallaher, off 7½p at 805½p, was one of only seven FTSE 100 stocks to finish lower on the day, with the defensive characteristics of the Silk Cut cigarette maker serving to outweigh the disclosure that Stuart Hainsworth, commercial director, has bought 100,000 shares at 815½p.

• NEW YORK: Fears that the Federal Reserve will drive up interest rates sent shares lower. The Dow Jones industrial average fell 46.90 to 10,891.90.

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