Market report: Hedge funds’ clear run leaves traders seething

Mickey Clark
17 Sep 2008

Wednesday 17 September - afternoon update

For most of the morning, stock market investors were left to grope around in the dark. No, the lights had not blown a fuse — but the traditional City way of maintaining an orderly market at all times appears to have done so.

In early trading this morning, shares of HBOS suffered another bear raid with the price briefly tumbling more than 40% to yet another new low of 88p. Once again the alarm bells sounded and stories began doing the rounds that the UK's biggest mortgage provider was in trouble. The Financial Services Authority retorted that as far as it was concerned HBOS remained in rude financial health and there was nothing to worry about.

Then the BBC ran the story that Lloyds TSB, up 20p at 299¾p, was poised to launch a rescue bid for HBOS worth 300p a share within 24 hours, and with the blessing of the regulators. Such a deal would create a bank with a value of £30 billion.
The HBOS share price subsequently bounced back to cut its loss to just 12p at 170p. Such was the volatility in the shares that circuit-breakers kicked in on at least four separate occasions to allow for a cooling-off period.

A staggering 400 million shares have changed hands today, but it was not until 1.30pm that HBOS finally confirmed it was in bid talks with Lloyds TSB.

Brokers and investors were left seething. They said trading in both HBOS and Lloyds TSB should have been suspended and the Takeover Panel should have insisted they put out an official statement to clarify the situation. Instead, Harry Hedge Fund and his pals were allowed to wreak havoc, while private investors looked on from the sidelines.

Meanwhile, attempts at “dead-cat bounce” following several days of heavy losses proved short-lived. Investors were initially cheered by the US government's £47 billion rescue of insurer American International Group, but the failure of the Federal Reserve to cut interest rates took some of the edge off the market's celebrations.
The FTSE 100 index fluctuated wildly throughout the day before losing its lead to nurse a fall of 14.2 at 5011.4. Leading shares have already lost more than 7% this week. The broader FTSE 250 index saw its lead pared back to 2.3 at 8411.4, having touched 8613.

London's setback this afternoon was pinned on Wall Street, which opened sharply lower reflecting a 10% fall in the share price of another US investment bank Morgan Stanley, which is believed to be looking for a merger partner. The Dow fell 189.2 to 10,869.8.

Barclays celebrated its acquisition of Lehman Brothers' investment banking arm from the receiver for a snip at $1.75 billion (£97.7 million) with a rally of 28p to 336p. Shore Capital says the deal offers Barclays a strong growth opportunity at an attractive price.
But Royal Bank of Scotland dipped 7.4p to 181.7p, and HSBC retreated 19¾p to 820p. Speculators wonder if HSBC is looking to merge with Morgan Stanley.

UK insurers also breathed a sigh of relief after learning AIG had been bailed out. Prudential put on 14¼p at 501p, while Friends Provident rose 1p to 82.7p and Standard Life 5¾p at 237¾p.
Inter-dealer broker Icap rallied 4½p to 412¼p after Dresdner Kleinwort began coverage of the shares with a buy rating and 555p target. The broker says despite recent financial instability, Icap remains one of the better growth opportunities in the financial sector.

Miners staged a fightback, led by bid target Lonmin adding 90p at 2632p. But it remains well below the 3300p-a-share being offered by rival Xstrata, down 79p at 2026p. UBS cut its rating on Electrocomponents, down 10½p at 161p, from neutral to sell and trimmed its target from 155p to 150p because of the deteriorating outlook for UK manufacturing, which accounts for about half its profits. The broker warns there is much less scope for margin expansion.