Suddenly M&S is back in vogue

It's amazing how much good a bit of bad news can do. As Matalan and others discovered, the market has not been in the mood to forgive any signs of weakness in the retail sector. So when analysts started to predict heavy losses from the Marks & Spencer trading statement, investors were braced for the worst.

It's amazing how much good a bit of bad news can do. As Matalan and others discovered, the market has not been in the mood to forgive any signs of weakness in the retail sector. So when analysts started to predict heavy losses from the Marks & Spencer trading statement, investors were braced for the worst.

Sure enough, the figures arrived on Tuesday and sales had fallen a further 5.1 per cent in year-on-year trading. But just as the City was poised to shout "sell", M&S revealed it had managed a small 0.8 per cent gain in profit margins. For a stock that has been battered by bad news, and lost a third of its value over 12 months, this was as good as it gets.

Rather than dishing out another helping of share-price misery, the market decided that, however minor, this was the turning point. The shares rose 4.5 per cent on Tuesday, and a further 6 per cent the following day. Many were at a loss to explain the City's sudden change of heart. Some suggested that M&S was now lined up as a bid target, others that it was on the brink of deriving even bigger margin gains from the critical spring period.

"I don't buy any of that," said one broker at Dresdner Kleinwort Wasserstein. "This is just a good old-fashioned piece of momentum-buying. No one knows how long it will last, so everyone wants in now."

The spirit of forgiveness started and ended with M&S. Just when Sema thought it had no further to fall, the market persuaded it otherwise. In November, the technology group said its inability to integrate LHS - a company it bought in July - had crushed profit expectations. On Tuesday last week it further admitted that fourth-quarter sales at LHS would not even reach the revised target of £35m. The shares plunged a grizzly 12 per cent, and prompted the Sema board to announce that it was seeking a replacement for chief executive Pierre Bonelli - a man whose reign has included an 87 per cent drop in share price in just 12 months.

Shipbroker H Clarkson produced an announcement the City does not see often: a positive profits warning. In a statement to the market, it said that "trading in the year ending 31 December 2000 is expected to very substantially exceed market expectations both in terms of turnover and profit".

Clarkson's shares were already high after the announce-ment in August that interim profits would be 400 per cent higher than in the previous year. The shares ended last week up a further 10 per cent and at an all-time high. The group has been a big beneficiary of shipping rates that have soared over the past 18 months.

The City was handed an interesting problem when the Bank of England revealed that the last interest-rate decision arose from a 5-4 split in votes. This has set economists wondering if the February decision will produce the UK's first rate cut for nearly a year.

When the news came out, investors favoured the debt-ridden telecoms companies, and delivered strong rallies to BT, Vodafone and Marconi. Unfortunately, the end of the week saw that trend upturned.

Mobile phone maker Ericsson confirmed on Friday what most investors already knew - that it has been steadily losing ground to its Scandinavian rival Nokia. Ericsson warned the market that sales and profits would be lower over 2001, and that its strategy now was to back out of the handset production business. "Analysts have been forever optimistic about Ericsson's outlook and they're being shot in the foot again," said Rob Sellar of Aberdeen Asset Management as the shares fell 11 per cent.

The news flow from Wall Street was even more gloomy. Although Merrill Lynch provided some cheer with word that revenue and profits were up over the quarter, both the old and new economies came up with bad tidings.

Lucent, the world's biggest maker of telephone equipment, said it would shed 16,000 jobs in a bid to return to profit by slashing $2bn (£1.3bn) of costs. Underwear maker Sara Lee said it would be firing 7,000 employees as part of a similar strategy, and US department store JC Penney estimated 5,565 jobs would go in its programme of closing 44 outlets. The week's worst casualty was Converse, which has been making basketball shoes for nearly a century. After five years of losses it filed for bank-ruptcy protection, and plans to move production to Asia.