Stock market report: Wednesday close

By Mickey Clark for MailOnline
Updated: 12:14 EDT, 14 January 2009

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A big sell-off of shares in Europe's biggest bank HSBC in Asia spilled over into London today, leaving the price nursing a loss of 51¼p, or 8%, at 588¾p, nearing its lowest level since 9/11 and the attack on the World Trade Center in New York in 2001.

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The big American broking house Morgan Stanley reckons the banking giant may soon have to turn to shareholders for extra funds of between $20bn and $30bn and halve the dividend.

The broker expects the bank's earnings to fall sharply this year with no prospect of recovery until 2011 at the earliest. Profits will be hit by falling returns on investments, combined with the impact of the global recession and foreign exchange effects, and this will impair HSBC's dollar cash flow.

'Our detailed study of HSBC's capital and asset quality position reinforces our belief that it will have to halve the dividend and raise major capital in 2009.' It also warns that HSBC's balance sheet is not as strong as most people might imagine. It has one of the weaker capital ratios in Europe and the second weakest in Asia. A detailed review of the subsidiary accounts shows that it has injected $11bn worth of equity into subsidiaries during 2008.

HSBC was the first bank to make writeoffs resulting from the collapse in the subprime lending market in February 2007, but has not, so far, gone to the government to ask for extra funds.

The rest of the banks were also making heavy weather of it. There is every likelihood that some of them will need to return cap-in-hand to the government later this year for a second round of funding which will result in them being fully nationalised. The full-year reporting season gets under way in a matter of weeks and should make interesting reading. The profits warning from Deutsche bank today came as a shock. Confirmation of more than 2000 job losses at Barclays' retail banking arm should have cheered the bank, down 23.8p at 142.1p, but it didn't.

Gossip in the Square Mile claims it could be the first target for the stockmarket bears when the short-selling ban expires on Friday. It has not approached the government for extra cash, relying on tapping sovereign wealth funds.

There were also losses for HBOS, down 10.9p at 70.1p, and merger partner Lloyds TSB, 15.8p to 117.2p. Standard Chartered fell 89.5p to 745½p. Royal Bank of Scotland was left nursing a loss of 9.4p at 41.7p. Some institutional investors claim the true value of the shares may be just a penny in the event of further funding requests.

Meanwhile, the London stock market extended its losing streak to six consecutive days. The FTSE 100 index fell 218.51 points to 4180.64, with losses among the banks accounting for around one third. It has fallen almost 500 points. Or nearly 9%, since Wednesday.

Wall Street also posted hefty falls this afternoon on the back of more gloomy economic news. The Dow lost 245.87 to 8202.69.

The gloomy trading update from Punch Taverns, down 18p at 39¾p, took a toll on the other debt-laden pub chains. Enterprise Inns fell 14¼p to 47p with Marston's off 7p at 120¾p, Greene King 31¼p at 424p and JD Wetherspoon 14p at 294¼p.

UBS reckons 2009 will be a tough year for the oil industry and does not believe that the pricing environment for the sector is likely to improve before the second half of the year.

As a result, investors are unlikely to have the appetite to pay for higher earnings until prospects become clearer. Its top picks are BP, 26¾p down at 488¾p, and Wood Group, 12½p lighter at 210p.

Margins are under increasing pressure at Drax, Europe's biggest coal-fired power generator, prompting Morgan Stanley to repeat its sell rating and drop its target to 495p. The shares lost 44p to 515½p. The key driver to its profits is the dark green spread, the margin on coal plants, which has lost 20% during the past month. Morgan Stanley prefers to put its money in Scottish and Southern Energy, down 5p at 1202p, which last week raised almost £500m to spend on acquisitions.

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Tomorrow's agenda

After a stream of profit warnings and job losses on the High Street, investors will be hoping for better news as retailers including Carphone Warehouse, HMV, Home retail Group and Jessops reveal trading results. The board of Carphone Warehouse will be particularly keen for some positive publicity from its third-quarter update after the group was mired in controversy surrounding David Ross's December departure. But analysts are gloomy, predicting a slowdown in new mobile phone and TalkTalk broadband connections for the next 18 months.

Brokers are a little more optimistic about HMV's Christmas trading statement, predicting that softer demand for home entertainment at the DVD and music retailer will be offset by revenue-raising opportunities unleashed by the demise of Woolworths and Zavvi. Investors are likely to ask questions about the firm's stability after the downfall of two big rivals. Bad news is also forecast from Argos and Homebase parent Home retail Group, where analysts expect a large drop in like-for-like sales.

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