Barclays spurs Footsie rally as banks return to favour

Its decision to stay out of the Government's asset protection scheme appears to be winning it fans. However, it has a long way to go to appease long-suffering shareholders who remember when their shares were changing hands at a peak of 760p two years ago.

The banks generally bounced back after yesterday's shake-out which was prompted by news of big losses and a further shedding of jobs at Swiss banking group UBS. In fact, bank shares accounted for three of the eight best blue-chip performers as the appetite for risk among some investors continued to improve. Sentiment was underpinned by some bullish comments from Barclays president Bob Diamond. He says the forthcoming reporting season will show some improvement which will continue throughout the remainder of the year.

Government-owned Royal Bank of Scotland firmed 1.8p to 29.5p. It was the heaviest traded stock in London yesterday with almost 300 million shares changing hands. Lloyds Banking Group also put on 7.6p at 91.7p — its highest since February — while HSBC added 8¾p at 485¼p.

Shares generally took their lead from Wall Street's positive performance overnight. The FTSE 100 index recovered from a hesitant start to climb back above the 4000 support level with a rise of 65.66 at 4034.06 Turnover levels remain on the low side with some investors clearly uncertain as to whether the recent rally, which has seen leading shares rise 12% during the past month, can be sustained. Financials were dragged higher in the wake of the banks with Legal & General adding 0.1p to 50.1p and Prudential putting on 20¼p at 383p. But Old Mutual dipped 1.4p to 61.4p after UBS downgraded its rating from buy to neutral, claiming the shares had "run a little too hard" of late.

It has been a miserable past year for the housebuilders. Their value has plunged following the collapse in the housing market, and many of them have breached their banking covenants. But there is growing optimism in the US that the housing market there may be bottoming out, and that provided scope overnight for a rally among America's biggest housebuilders. That spilled over into London, where gains were seen in Barratt Developments, up 15½p at 168¼p, Bovis Homes 12p at 476p, Persimmon 7p at 394¾p, and Redrow 5p at 210p.

Builders' merchant Travis Perkins put on 34½p at 604p after Collins Stewart began coverage of the shares with a buy rating and 721p target. It says the shares have been largely dictated by debt concerns during the past year. But Travis Perkins is described as a "highly focused" business with superior margins and a very attractive valuation.

JPMorgan has downgraded luxury goods retailer Burberry, off 6½p at 343½p, from overweight to neutral and dropped its share-price target from 350p to 335p, blaming a less attractive risk-reward ratio with the shares now trading on almost 12 times earnings for 2010.

That is a 5% discount to the luxury goods sector and a 20% discount on the historic average. Burberry reports second-half sales next week, and the bank is looking for underlying sales growth of 1%.

Credit Suisse has repeated its outperform rating on holiday operators Thomas Cook, up 17p at 276p, and TUI Travel, 15½p at 270½p. It has raised its target on TUI from 280p to 349p and on Thomas Cook from 290p to 333p, and says that despite the likelihood of a relatively poor second quarter, both companies are on track to deliver material profits growth this year and further margin improvement next year.

The broker says ownership issues could affect share-price targets in the short term but, even at these prices, the multiples do not look stretched.