Markets: Troubled sector on the bounce

LONDON FTSE 100 CLOSE 5,244.06 +76.59

A SURGE in banking shares drove the FTSE100 higher yesterday on hopes that the prospects for the sector may have turned.

Barclays kicked off the reporting season with a slightly mixed message, as weak profits at its UK retail business were more than offset by exceptional results at its investment banking division.

The bank topped the FTSE100, which James Hughes, a market Analyst at CMC Markets, said was driven by comments from Bob Diamond, the head of its investment banking division, about the expected US economic recovery.

"Diamond said that he expects the economic recovery in the US to accelerate in 2010 and it seems that Barclays may be more dependant on the strength of the US economy rather than that of the UK in the next 12 months."

Shares in Barclays rose 6.8 per cent to 293.75p.

Royal Bank of Scotland was close behind, buoyed by the sale of its commodity trading business. The part-nationalised bank rose 5.25 per cent, or 1.66p, to 33.26p. Lloyds Banking Group was also a strong gainer, closing up 4.7 per cent at 49p.

The wider FTSE100 rose 76.59 points at 5,244.06, boosted by strong gains by mining companies as commodity prices rose. The midcap FTSE250 index rose 103.31points to 9,176.27.

Fears over sovereign debt levels in the eurozone appeared to ease, while news that UK inflation had hit 3.5 per cent in January failed to shake the positive mood, with the level in line with expectations.

Vedanta Resources jumped 5.2 per cent, or 123p, to 2490p, as base metal prices climbed, while Randgold Resources rose 183p to 4,693p and Eurasian Natural Resources jumped 36.5p to 966.5p.

Oil companies were boosted by stronger crude, with the price of oil rising above $75 a barrel.

BP jumped 2.24 per cent, or 12.9p, to 588.2p while explorer Cairn Energy rose 2.8 per cent to 346.5p.

InterContinental Hotels was the biggest faller in the leading index yesterday, after the Holiday Inn owner warned that room rates remain under pressure, with tough trading set to continue. Shares dropped 27p to 893p

Traditionally defensive companies were generally out of favour, as investors turned back to banking shares. Imperial Tobacco dropped 35p to 2,004p, while consumer goods group Reckitt Benckiser fell 33p to 3,282p.

Among the midcaps, Aberdeen-based oil explorer Dana Petroleum rose as much as 4 per cent Exane BNP Paribas increased its rating on the shares to "outperform" with a target price of 1,400p. Shares in Dana lost some ground later in the session, closing up 35p, or 3.3 per cent, at 1,086p.

Fund manager Aberdeen Asset Management rose 0.8p to 117p, despite analysts at UBS cutting their target price by 35p to 120p.

Premier Foods, the makers of Mr Kipling and Hovis, rose 3 per cent after it returned to the black with a bottom-line profit of 47 million. Chief executive Robert Schofield said the company had achieved a "tremendous amount" in 2009 as he mapped out targets for growth over the next three years. Shares rose 1.11p to 33.4p.

Babcock International, which plunged on Monday night after confirming it had approached rival VT Group, recovered yesterday as Brewin Dolphin added the company to its "conviction buy" list. Shares in Babcock jumped 8.3 per cent to 547p. VT Group, which rose 15 per cent on Monday, climbed a further 1.9 per cent to 595p.

On the Aim, speculators pushed shares in debt-laden oil services group Sovereign up 50 per cent to 4.12p. The company is locked in talks with bankers, and has warned that it may need to carry out a dilutive debt for equity swap.