Market report - afternoon update

Hovis baker Premier Foods came under intense pressure today as it was hit by a fresh wave of speculation that it is in danger of breaching its banking covenants.

The shares were down by more than 50% at one stage, prompting calls for a statement from the country's biggest branded foods company. Eventually, one arrived but only partially managed to reverse the falls despite unequivocally saying Premier will meet its financial covenants in 2008 and is not planning to issue any equity or equity-linked products.

With Premier still down 7p, or 20%, Panmure Gordon analyst Graham Jones said the market had overreacted and immediately upped his recommendation from hold to buy, with a 70p price target.

Premier, which also counts Mr Kipling, Sharwood's and Branston among its top 10 brands, admitted at the start of the week that it was in talks with a number of parties over ways to reduce its £1.8 billion debt mountain.

Sources suggested that CCMP, the former private-equity arm of JPMorgan, could make a major investment via preference shares or a convertible debt instrument. Jones repeated Premier's view that your house doesn't have to be on fire to buy an extinguisher and has concluded that the company is not on the point of meltdown.

With banks reluctant to lend, debt is set to be an increasingly ominous theme for markets in coming weeks, hitting housebuilders and others whose growth has been financed by expensive acquisitions. Heavily geared landlord Punch Taverns is a case in point. It owes about £4.5 billion, compared with its market value of £436 million, and fell 11½p to 115¾p. Meanwhile, JPMorgan halved its target for retailer DSG, down 1p to 25p, on debt worries.

Diageo rose 11p to 833p as investors digested its move into the bond market. The Guinness brewer has become the first major corporate to tap the bond market since the credit crisis entered its latest phase, with a $1 billion (£578 million) five-year bond at a fixed rate of 7.375%. Although the US bond issue was priced at 462.5 basis points over Treasuries, traders said the deal showed there were people looking for somewhere to invest.

A tentative rebound saw the FTSE 100 gain 124.17 points to 3985.56, a rise of 3% despite a weak opening on Wall Street. The Dow Jones failed to build on yesterday's 400-point gain, falling 67.7 points to 8911.56.

But renewed selling of insurance groups and miners — mostly fuelled by growing doubts about China's growth rate — capped gains. Kazakhmys, which announced it was no longer in merger talks, led the fallers, down 9½p at 280p, while Vedanta was 34p lower at 598½p. A series of profit warnings left the FTSE 250 struggling to make headway as Savills, Inchcape and UK Coal's gloomy tidings eroded confidence.

Rumours of an imminent cut in production by the Opec oil producers' cartel in response to the slump in the oil price and a note to clients from Goldman Sachs focused attention on the sector. Goldman favours Royal Dutch Shell, up 80p at 1374, over BP, arguing its strong marketing division will help to minimise the fall in revenues from lower prices. It upped Shell to buy from neutral and lowered BP, up 14½p to 412p, to neutral from buy, with a target of 570p.

Investors sought the relative security of pharmaceuticals such as GlaxoSmithKline, up 63p at 116½p, and Smith & Nephew, 34.2p higher at 530.5p. Value supermarkets chain Wm Morrison, one of the early retailers to cut petrol prices, was up 11p at 242¼p.

Lara Croft creator SCi Entertainment rose 3¾p to 24p on emerging evidence that Time Warner may be preparing to launch a takeover bid. Time Warner yesterday picked up five million shares in the group, taking its stake to more than 16%. Time Warner representative Kevin Tsujihara today resigned from the SCi board.