Market Report: Persimmon leads rally on hope of rate cut

Persimmon led the housing sector higher after Citigroup said that, given the turmoil in the financial markets, there was a "decent chance" of an emergency reduction in interest rates.

The broker said that European central banks, including the Bank of England and the ECB, might make a decision to cut rates soon, "perhaps this week, especially if the US Federal Reserve is ready to cut again".

"Early easing [ie this week or next] may help reduce risks of a severe financial collapse and deep recession," the broker said, adding that the costs of central bank inaction now probably outweigh the risks of an early reduction.

Traders said a cut should provide some respite for the housing sector, which has suffered amid the reduction in mortgage lending. A rate cut is not a quick fix for the sector, market sources added, but, given the recent losses in sector share prices, it might provide some short-term strength.

The hopes took Persimmon to 398.25p, up 6.98 per cent or 26p, while Barratt Developments advanced to 104.75, up 2.7 per cent or 2.75p. Bovis Homes was up 2.1 per cent or 7.75p at 377p and Bellway gained 3.5p to 540p.

The sector shrugged off negative comments from Dresdner Kleinwort, which said that a tour of property markets in the Midlands and the north of England had revealed "carnage beyond even our most bearish expectations".

Overall, hopes that Congress might approve the US government's $700bn bailout package before the end of the week helped the London market bank gains. The FTSE 100 was up 83.68 points at 4,902.45; the FTSE 250 climbed 95.28 points to 7,888.21. In the banking sector, HSBC gained 36p to 901p after Collins Stewart advised investors to "buy", noting that the "the margin of defeat [in the lower house of Congress] was relatively small, so some small concessions would appear likely to secure the bill".

HBOS, on the other hand, was weak after rumours that Lloyds TSB was seeking to renegotiate its merger offer. The stock went as low as 113p, down 29p, on account of the speculation, recovering to 122.4p, down 19.6p, by the close. Lloyds, which gained 9.25p to 226.25p, declined to comment on the rumours.

Royal Bank of Scotland traded lower, down 2p at 179p, despite assuring investors about its investment in ABN Amro. The bank said that the sale of Fortis's interest in RFS, ABN's holding company, did not affect the parts of the business retained by it or the anticipated benefits of integration. "Fortis has already paid in full in cash for its shares in RFS, and should it sell this holding the financial consequences would lie with Fortis," RBS said.

In the mining sector, Lonmin strength-ened late in session, up 7.87 per cent or 166p at 2,274p, after a large trade in the closing auction led some to think that Xstrata, up 8.75 per cent or 138p at 1,716p, was set to formalise its 3,300p-per-share offer.

The surge was at odds with the sentiment earlier in the day, when Lonmin touched a low of 1,929p, down 179p, amid talk that the Anglo-Swiss miner was likely to let the Takeover Panel's Thursday deadline lapse without a firm bid. Liberum Capital, which weighed in on the deal, said that, given Lonmin's valuation and the legislative impasse over the American bailout plan, there was less than a 50 per cent chance that Xstrata will pursue a full bid.

The broker added, however, that "Xstrata are hosting an analyst trip to Norway now and have so far given nothing away as to their intentions."

Also on the upside, Icap was the strongest on the FTSE 100, up 22.73 per cent or 65.75p at 355p, after house broker Merrill Lynch weighed in with words of support, calling Monday's share price fall "extreme" and advising investors to "buy".

"In the spirit of conservatism, we have reduced our estimates by 10 per cent for 2009-2011, in line with what we take to be the gloomy end of management guidance" the broker said, adding: "On the basis of our new numbers, the stock is trading on single figure multiples, which strikes us as massively cheap given its market position and cash generation ability."

On the FTSE 250, pub stocks rallied after Enterprise Inns, up 13.51 per cent or 21.25p at 178.5p, posted a better than expected trading update, and said it was putting plans to convert to a real estate investment trust on hold. The update cheered Punch Taverns, which was up 12.03 per cent or 14.5p at 135p.

Among smaller companies, Aga Rangemaster fell back to 146p, down 3.79 per cent or 5.75p, after Panmure reduced its target price for the stock from 140p to 125p.

"A high fixed-cost structure and a low operating margin means that Aga is poorly positioned going into the consumer slump," the broker said, advising investors to "sell".