Market watch - Banking and retail woes set to worsen City jitters

Published on Saturday 5 July 2008 14:44

A DISASTROUS week for retail and housebuilder stocks saw the FTSE 100 temporarily dip into bear market territory when it fell to 5358 on Thursday.

The position, which marks a 20% decline since last year's high, satisfied the official definition of a bear market.

Although it climbed back up to 5412.8 by the end of the week, London's leading stocks lost a staggering 117.1 points over the five days.

It was a particularly bad week for Marks and Spencer after it issued a profits warning on Wednesday. Shares nose-dived, closing the week down 32% at 227p.

The housebuilders also took a battering after Taylor Wimpey management admitted it had not secured the 500m it needs to raise in extra cash, and its stock lost 49% of its value over the week, closing at 31.75p. Rival firms fared similarly poorly, with Barratt Developments shares finishing the week off 34% down at 42.25p.

News that the US private equity firm Texas Pacific Group had walked away from a 179m deal to buy 23% of the mortgage lender Bradford & Bingley sent banking stocks into reverse. Shares in the FTSE 250 company plummeted 21% over the week to 50p. A warning from Goldman Sachs on Friday that European banks would be forced to raise millions more in cash did little to help its FTSE 100 rivals, and Royal Bank of Scotland ended the week at 206.25p, a decline of 5%, while Barclays closed down 6% at 279p.

Retail and house building will continue to dominate the markets this week, with the M&S AGM, updates from the likes of Sports Direct International and further trading updates from Barratt Developments, Redrow and Persimmon.

Annual results from Newcastle United chief Mike Ashley's Sports Direct International are expected to do little to lift sentiment on the high street when they are presented to the markets on Thursday. The sports chain is tipped to deliver underlying earnings of 148m for the year to April 27, a significant blow compared with last year's haul of 191m.

The fall has been blamed on poor conditions for retailers generally, while the English football team's failure to qualify for Euro 2008 is estimated to have hit the firm to the tune of 70m in lost replica kit sales.

However, Oriel Securities analyst Ramona Tipnis says the retailer could benefit from shoppers scaling down their budgets and moving away from the more expensive chains.

"With customers polarising, either by trading up to more premium brands or by trading down the price chain, they should be slightly more resilient," she said.

After the sharp falls in food sales reported by M&S last week, analysts are keen to see how Associated British Foods has fared.

The company, which makes Kingsmill and Ryvita and which also owns the budget clothing chain Primark, had a good start to the year, reporting a 5% profits hike in the six months to March 1, buoyed by an "excellent" performance from Primark.

Martin Deboo of Investec Securities says the situation is likely to be similar when AB Foods presents its latest update on Thursday.

He said: "I think the Primark numbers will be the most closely watched of the figures, in light of M&S this week. My personal view is that Primark should continue to trade quite strongly."