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Britain's top stocks were pegged back for the first day in three, with BP doing most of the damage after its quarterly profit came in below City forecasts. Weak sales data from the high street also caused a dent, as did worries about increased competition among the UK banks.
The FTSE 100 index closed lower by 25.6 at 5746.8, with the wider indices following suit. Renewed bid speculation for mid-market retailers Woolworths and Matalan helped provide a little support, as well as inflating total turnover to close to 4 billion shares.
Across the Atlantic, the Dow Jones Industrial Average rallied off an opening drop to hold close to little changed at the European close. General Motors was the big story after the carmaker halved its dividend, the first cut in more than 13 years. A sales warning from house builder Toll Brothers provided the market's main negative.
Like-for-like sales rose just 0.2 per cent in January compared with last year, the BRC said. That followed a 2.6 per cent annual rise in December and marked the worst start of the year since the survey began more than a decade ago.
On a category level: apparel was slightly down, led by men's and children's ranges; women kept buying clothes but stopped buying shoes. Gardening supplies and power tools were notably weak, as was homeware. There was no revival of demand for white goods and big ticket items. The furniture and new technology categories were not too bad, albeit with steep price deflation. The only clear winner was the entertainment category, thank you Arctic Monkeys.
"After the pre-Christmas upturn, we are now back to the reality of a tough, discount driven retail market," said Kevin Hawkins, the BRC director general.
Dixons owner DSG International closed down 3.5p at 172.75p. Also on offer were Marks & Spencer (off 6.25p to 495.25p) and GUS, which lost 9p to 1057.5p having been lifted yesterday by speculation of private-equity interest.
The smaller stores were better placed: Woolworths was ahead 2p to 34.5p as the peculiar rumour about takeover interest from WH Smith refused to die -- even though most analysts and stock-watchers consider it extremely doubtful.
More credible was talk that Baugur, the Icelandic investment group, had been selling down its 13 per cent stake in French Connection to raise cash for another deal. French Connection closed lower by 7.75p to 260.25p.
WH Smith itself added 10.75p to 408.45p -- partly on the Baugur story, and partly because Cazenove said shares are undervaluing the recovery potential and repeated "outperform" advice.
Track today's biggest movers by industry sector here.
There was another run-out for talk that discount retailer Matalan (up 7.5p to 180.5p) could be a target for Wal-Mart. That follows a story in the Sunday Times claiming the US retailer is stepping up its drive to push into non-food by rolling out Asda's "Living" format, the Martha Stewart-soundalike store that has been successful at a Lakeside test site in Essex.
Asda, owned by Wal-Mart, will open 15 Living shops this year from a standing start, the report claimed. Such a programme would mean the US firm would need propery, and Matalan could potentially provide the right kind of out-of-town stores.
While industry insiders believe trading at Matalan has leveled out, the company is still thought to be in a bit of a mess internally after John King, its chief executive, gave notice last month. That could help convince the founding Hargreaves family, 52 per cent shareholders, to cash in their stake, stock-watchers argued.
However, Matalan's portfolio -- 190 stores, 5.5 million square feet -- goes way beyond Wal-Mart's initial needs. And, if the intention would be to roll the Asda brand name out across the network, the competition regulator would likely take an interest.
Read the Sunday Times report here.
Among the fallers, HMV sank 3.75p to 184p on talk that Permira will walk away from a possible bid on the retailer. That proved wide of the mark as, after the close, HMV revealed it had rejected a 190p bid from Permira. That was shy of the 200p that had been widely rumoured.
Track HMV shares here.
BP was among the weakest blue-chip markets, sliding 18p to 647.5p after its fourth quarter earnings missed market expectations, partially because of stoppages and rising costs at its Texas City refinery.
Europe's biggest oil company reported fourth-quarter profit up 26 per cent to $4.432 billion on a replacement cost basis. That included a $553 million charge for non-operating items (mainly a non-cash loss on North Sea gas contracts) and $232 million on unforecastable accountancy effects.
Cutting out all the one-offs and book-keeping skews, BP’s underlying profit was $4.985 billion -- well below the $5.60 billion expected by the City on the same basis. The Texas refinery was the biggest factor in the miss, costing $700 million over the quarter, almost double previous guidance.
Another negative came with production guidance, with BP targeting output expansion of 4 per cent a year out to 2010. The company had previously been aiming for 5 per cent growth annually until 2008.
Merrill Lynch called BP's report "a very disappointing set of results". Citigroup called them "messy", adding that "some of the shine may have been taken off BP's investment story".
For more on BP, click here.
Elsewhere among the blue chips, Aviva revealed better-than-expected annual sales, buoyed by a continued strong performance in continental Europe and signs of faster growth in its domestic market. Shares added 6.5p to 734p.
Britain's biggest insurer said group sales 2005 rose 10 per cent to £24.6 billion on the industry-standard present value of new business premiums basis. Analyst forecasts had centred at £22.12 billion.
For detailed information on Aviva, click here.
Alliance Unichem added 22.5p to 882.5p after the Office of Fair Trading unexpectedly said it will not refer its merger with Boots to the Competition Commission. A full referral could have delayed the proposed merger until next year.
The regulator instead requested the groups to dispose of about 100 UK stores, equivalent to about 2 per cent of combined retail revenue. "Not too onerous," said Citigroup.
Boots shares inched higher by 9.5p to 684.5p. They had gained strongly yesterday on speculation that the merger would be referred, potentially giving a private equity house the window to stick in a takeover approach.
Track Boots shares here.
Amvescap was the top FTSE 100 performer, up 27p to 534.5p as traders looked beyond slightly disappointing annual results and focused instead on a strategic review from Martin Flanegan, the group's new chief executive.
Mr Flanegan outlined plans to cut operating costs by $120 million in the current year, equivalent to about 7 per cent of expenses in 2005.
Even though Amvescap's annual earnings were about 4 per cent below expectations, at 19.5p per share, the cost-savings alone were seen as sufficient for estimates to rise.
For detailed information on Amvescap, click here.
Vodafone closed down 0.25p to 115.75p, underperforming the rest of the European telecoms sector, which saw demand after results from KPN came in ahead of expectations and Sonae made a bid for compatriot Portugal Telecom.
That followed some pretty weak numbers from Vodafone Japan overnight. The loss-making unit reported just 17,600 net additions for January, a 6.9 per cent share of new connections, after rivals DoCoMo and KDDI cut prices. That negated a couple of promising months for Vodafone Japan, when it reported market shares of 11 per cent and 18 per cent.
Track Vodafone shares here.
Bank stocks struggled to make progress JPMorgan's team raised concerns that profit margins for UK retail lending will become vulnerable once the sector adopts new international standards for testing capital adequacy. Alliance & Leicester slipped 3p to 1026.5p and HBOS was down 6.5p to 981p.
The Basel II accord -- drawn up by bank supervisors and central bankers from 13 countries of the Basel Committee of Banking Supervision -- will standardise the way banks and regulators measure for sufficient capital to support market, credit and operating risks. By the end of this year, it will relax risk measurement approaches for some banks.
"With less than a year to go until Basel II starts to be rolled out, the risk to our estimates is firmly on the downside," JPMorgan told clients. That view is the opposite to the City orthodoxy, which currently assumes that the rule changes will free up capital for the retail banks as both mortgages and unsecured loans will be reclassified as lower-risk assets.
But JPMorgan argued that, while Basel II will initially increase notional profitability on lending books, it will be a "likely catalyst for a step change" as it will encourage even fiercer competition for mortgages. The broker forecast mortgage spreads to drop by up to 30 per cent, pushing returns back to the same levels as today.
For unsecured loans, JPMorgan reckoned competition is already at such a level that the high street banks are struggling to break even on their investment. It therefore argued that, given Basel II's added regulatory and rating restrictions on capital release, the benefits from the excess capital created will probably go to customers rather than shareholders.
That led JPMorgan to rate the UK retail banks -- Lloyds TSB, Bradford & Bingley, Alliance & Leicester and HBOS -- "underweight" in new coverage. It preferred the "more diversified, capital intensive" lenders such as Barclays and Royal Bank of Scotland, which were both rated "neutral".
Northern Rock, "by virtue of its leaner cost structure, is probably the best positioned to face the likely challenges" and merited a "neutral" rating too.
For more on Basel II, click here. For a crib sheet on capital adequacy, try this.
Computacenter led the mid-caps lower for much of the day, finishing down 7.25p to 280.75p after Deutsche Bank cut the shares off its "buy" list. That follows Computacenter shares rallying strongly since mid-January, when the firm said management buy-out talks had ended and its trading was better than expected.
The end of buy-out talks led traders to speculate that Computacenter would be better able to release its £103 million cash pile for increased dividends and buybacks. However, Deutsche argued that recent gains have priced in buybacks accounting for the entire year-end cash balance. It therefore moved to "hold" on an unchanged target price of 260p.
For detailed information on Computacenter, click here.
EasyJet slipped 5p to 377p after it said passenger numbers in January rose 11.2 per cent to just over 2.3 million. The load factor -- the proportion of available seats filled -- down to 74.2 per cent from 76.4 per cent a year ago.
Andrew Harrison, the airline's chief executive, said: "Our total revenue performance this month was in line with our expectations and our guidance for the year to September 2006 remains unchanged."
For detailed information on EasyJet, click here.
Independent record label Sanctuary jumped to the top of the smaller-cap risers on a gain of 1.23p to 1.90p. Demand was said to be coming from day traders, who were taking the shares in order to jump the queue for the firm's rescue cash call.
Sanctuary plans to consolidate shares and raising £100 million net of expenses via a placing and open offer at 50p each. On a pre-consolidated basis, the placing price will be equivalent to 0.25p apiece.
For those who do not take up the offer, existing capital will be diluted to less than 1 per cent. Today's gain therefore gave Sanctuary an implied stock market capitalisation in excess of £700 million -- a higher valuation than for companies such as Avis Europe, Dairy Crest and Durex maker SSL International.
It was impossible to see how such a valuation could be justified. Sanctuary last year made an operating loss of £41.6 million. And, while it has agreed with HBOS to cancel £35 million of debt, it had year-end liabilities of £140 million.
Moreover, Sanctuary remains in a fight with its auditors, who are expected to release a critical report on the group's new accountancy practices any day now. And there are questions as to whether management -- mostly unchanged since the company's near-fatal expansion into American urban music -- can still count on support from either the City or the industry.
On broker watch:
Goldman Sachs moved Brixton to "underperform" from "in-line" and cut Hammerson to "in-line" from "outperform".
Citigroup rated Peter Hambro Mining a "buy" in new coverage, with a share-price target of 18p.
Sandford Bernstein started BSkyB with an "outperform" rating and 600p target price.
Panmure Gordon cut Savills to "hold" from "buy".
Teather & Greenwood started WPP with a "buy" and Aegis with a "hold".
Regent Inns was cut to "hold" from "buy" at Dresdner Kleinwort.
RM was raised to "buy" from "add" at Altium.
Peel Hunt moved JKX Oil & Gas to "hold" from "buy".
And UBS cut Smiths Group to "reduce" from "neutral".
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