Market Report: Banks tumble on fears of hedge fund casualty

The banking sector was hit by a double whammy yesterday, sending share prices across the industry tumbling.

The banking sector was hit by a double whammy yesterday, sending share prices across the industry tumbling.

Barclays dropped 11.5p to 542.5p, Lloyds TSB retreated 4p to 463.5p, HSBC lost 2.5p to 857p, HBOS gave up 7p to 791p and Royal Bank of Scotland fell 12p to 1,626p as rumours circled dealing rooms that a major US hedge fund is on the brink of collapse.

Should such a scenario come to pass it could be quite damaging to banks because hedge funds borrow huge chunks of cash from them, which they then use to punt on the stock market.

According to yesterday's rumours, a number of US hedge funds have been burned particularly badly by last week's sudden jump in the price of General Motors shares on Wall Street.

They are said to have been betting against the US car giant prior to the move by the billionaire Kirk Kerkorian to double his stake in the company, which sent the stock soaring. If a major US fund were to go bust it is likely to leave those banks who lent money to it seriously out of pocket.

Meanwhile, a cautious research note from Deutsche Bank also wounded sentiment towards the sector. The broker said: "In an environment of slowing GDP growth we believe it will be increasingly difficult for banks to generate upward earnings momentum."

Deutsche predicts that UK unsecured lending is going to continue to be difficult in terms of volume growth and warned that growing regulatory scrutiny may also impact the profitability of banks. The broker therefore urged investors to concentrate on international diversified players and named HSBC as its favourite.

Meanwhile, the FTSE 100 retreated 17 points to 4,892.4 while the FTSE 250 suffered a more severe drop, losing 45 points to finish at 6,744. Rolls-Royce gained 6.5p to 251.5p as analysts came away from a dinner hosted by the aerospace group in a bullish mood. Credit Suisse First Boston described the event as "reassuring", while Numis Securities tipped the group's shares to enjoy a "substantial re-rating" over the coming months. It believes that Rolls-Royce is about to start cashing in on a decade of major investment in its products.

The retail sector was again a talking point. Marks & Spencer slumped 8.75p to 321.75p as dealers reported heavy shorting of the stock. Technical analysts, who follow share-price charts and use them to predict the future, believe a bear position in M&S could prove to be a good bet. They noted that the stock stands at a six-month low, after breaking through a key resistance level yesterday, and suggested that it could easily find itself heading towards the 280p.

Elsewhere in the sector, Dixons dropped 1p to 141.5p before today's trading update from the electricals group. Analysts expect the company to deliver a 2 per cent drop in like-for-like sales, but there is some worry things could prove to be a lot worse given the slowdown on the high street. According to the latest report from the British Retail Consortium, big-ticket items, such as the white goods sold at Dixons, fared particularly badly last month.

ScS Upholstery dropped 17p to 330.5p on rumours the furniture retailer's interim results this month will disappoint. A similar rumour circled Peacocks, 6.25p lower at 217.75p, but City sources poured cold water on talk that the discount retailer is struggling. In fact, they suggested that Peacocks is, at present, among the best performers on the high street.

Evolution Group dropped 9p to 139p as market professionals suggested that the broker's reputation has been dented by the débâcle, after the £45m fund raising Evolution conducted for Regal Petroleum last month. On 25 April, the broker placed 11.5 million new shares in the oil and gas explorer at 390p with institutional investors. The institutions that took part in the cash call are said to be unhappy as the shares have tanked since the placing. Yesterday, just two weeks after the fund raising executed by Evolution, Regal stood at only 276p, up 6p on the day.

Lower down the pecking order, Knowledge Technology Solutions rose 0.25p to 4.37p after its chief executive, Mark Pinter-Krainer, bought 250,000 shares at 3.5p. TeleCity was unchanged at 20p despite the disposal of 2.5 million shares at 19.5p by Michael Hepher, the chairman of the internet services group. Mr Hepher now holds just 1.5 million shares. Last week, TeleCity confirmed it had abandoned takeover talks with the venture-capital giant 3i.

Ukrproduct, the Ukrainian dairy group, added 4p to 67p on the back of strong maiden results. Ukrproduct is the first company from the former Soviet state to list in London.