Market Report: BofA backs retail therapy to beat gloom

So it was the second day after the end of the summer holidays, and traders were struggling to shake off the back-to-work blues. Bank of America-Merrill Lynch yesterday recommended a bit of retail therapy.

The broker launched its first combined retail coverage note, which recommended some top buys for the Autumn season. Of those, Morrison Supermarkets was looking particularly tasty, up 3.55 per cent at 285.8p. Analyst John Kershaw said the shares have drifted since bouncing in July.

"Notwithstanding ebbing UK food inflation, we think full-year consensus numbers remain too low and that Morrison can continue to outperform the UK grocery market, in like-for-like terms, as customers continue better to appreciate the Morrison brand and offer." Other picks included include Marks & Spencer and Kingfisher.

The FTSE 100 looked lacklustre as its was dragged down by falls across the Atlantic overnight. Traders said much of the afternoon was taken up with thumb twiddling and the index closed just two points down at 4817.5.

There was a Mexican wave of support for BP after it struck black gold. Investors were dancing for joy after the group announced it had hit a "giant" oil discovery in its Tiber Prospect off the Gulf of Mexico. BP owns 62 per cent of the interest with Petrobras and ConocoPhillips. Fuelled by this Tiber in its tank, the shares spurted to the top of the pile, up 4.26 per cent to 541.65p. Rival BG Group also rose from the positive read across, up 1.7 per cent to 1011p.

The operator of the Docklands Light Railway, among many, many other things, Serco Group was still looking perky yesterday as it continued its inexorable rise. After strong interims last week, with profits rising a third in the first half, it signed new contracts with the government worth up to £500m on Tuesday. The goodwill sent it up 3 per cent to 469.6p.

On the downside, Legal & General fell 8.66 per cent to 68p on fears that the UK insurers would have to raise £50bn from investors related to new European Union proposals. The Association of British Insurers was moved to write to the Chancellor Alistair Darling encouraging on him to intervene to prevent proposals calling on European insurers to lift capital and reserves requirements.

Uncertainty in US financials weighed on the UK sector. The worst was Lloyds Banking Group, which was hit by the gathering storm over whether it was or wasn't canvassing support for a rights issue. The shares closed 6.23 per cent down at 99.41p One paper said it had backing for a £10bn cash call, but news from a "top investor" emerged later that it hadn't really been asking at all.

As spot iron sales to China fell to a nine-month low, the miners fell with them. While Eurasian National Resources Corporation had been the worst of Tuesday's blue-chip fallers, fellow Kazakh miner Kazakhmys was among the worst in the sector yesterday, down almost 3.5 per cent to 920p.

The housebuilders had been looking creaky on Tuesday and continued to list badly yesterday as fresh doubts hit the strength of sales activity in the sector. On the second line, Taylor Wimpey was the worst hit. The roof came crashing down 4.5 per cent to 45.50p.

Worst on the FTSE 250 was Melrose, down 6.4 per cent to 152p. The manufacturing buyout firm has gone great guns since mid July, storming up 46 per cent, but the support fell off yesterday and investors decided it was time to take profits.

Ashtead Group, which rents tools and equipment, rose initially after support from UBS. Analyst Alexander Hugh, said: "Across the rental space we still see reasonably good upside if the market continues to re-rate the stocks back to mid-cycle earnings." He backed Ashtead but the stock retreated in the afternoon, closing 2.5 per cent lower at 79.5p.

On the up side, the ongoing interest in National Express had the shares motoring yesterday. The train and bus company rose 1.73 per cent to 412p on reports that the consortium of Cosmen and CVC Capital Partners were set to sweeten the 450p per share takeover launched last week.

But the small caps were pretty down. One market maker said he saw plenty of selling: "After a solid few weeks it has run out of steam. Investors in the small caps are beginning to take profits and we can see that trend carrying on in September." The FTSE Small-Cap index fell 1.44 per cent to close at 2630.150 points. Property investment company Wichford was the biggest victim, down 13 per cent to 10p, followed by Workspace Group which closed down 8.5 per cent to 18.75p. There was a mountain to climb for K3 Business Technology Group as pre-tax profits plunged from £900,000 in the first half of last year to £130,000, smashed by the current economic downturn. It fell 8.1 per cent to 85p.

Top of the tiddlers was Holidaybreak, which extended its winning run since the beginning of August, closing 6.32 per cent up at 290p. Engineering consultancy Scott Wilson was up 3.3 per cent to 92p after a positive update. The group said full years would be in line. It was supported by Collins Stewart which has a "buy" recommendation and a 105p target price.