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FTSE 100 jumps nearly 3% as bank shares recover

Traders were in buoyant mood as the market played catch-up to the US and Asia after the bank holiday, with bank shares leading the way.

Royal Bank of Scotland rose 1.76p to 23.64p as analysts at Deutsche Bank issued a positive note on the sector generally, and RBS in particular. Deutsche raised its recommendation on RBS from hold to buy after its recent falls, with a 35p price target. Analysts Jason Napier and David Lock said:

There is a right price for everything, and we think the last month’s moves are overdone. We expect strong management will continue to deliver value in core while managing non-core risk. We expect earnings and capital formation will (ultimately) surprise positively.

Deutsche labelled Barclays, up 10.4p at 165.4p, as its top pick in the sector, and also put a buy rating on Lloyds Banking Group, 2.315p better at 32.03p. Part of the reason was a recent spate of share purchases by bank directors. Deutsche said:

Evidence on the aggregate wisdom of bank directors in the timing the purchase and sale of equity may be mixed but, assuming that no matter how wealthy an individual might be, knowingly wasting money in buying stock at the wrong price is fairly unlikely, means there is some information inherent in insider buying and selling activity. In recent days we have seen stock purchases by the chief executives of Barclays, LBG and RBS in particular.

The sector also benefited from news of the merger of two Greek banks, as well as comments from EU commissioner Olli Rehn who said the health of EU banks had improved over the past year.

With the boost to bank shares, the FTSE 100 finished 138.74 points higher at 5268.66 – its biggest increase since August 11. The rise added £36bn to the value of Britain’s top companies and came despite an uncertain start on Wall Street following disappointing US consumer confidence figures ahead of Friday’s key US non-farm payroll data.

Mining groups were also wanted as risk appetite returned, with Vedanta Resources up 91p at £13.37 after JP Morgan Cazenove highlighted the company as a beneficiary of emerging market growth. Lonmin climbed 100p to £12.75 and Fresnillo finished 121p higher at £19.99.

Smith and Nephew added 22.5p to 596.5p on renewed talk of a possible bid from a rival, with US group Styker and a price of around 850p a share mentioned. S&N has long been tipped as a takeover target, with Johnson & Johnson and Biomet both suggested in the past as potential predators.

But retailers slipped back, with Tesco down 0.8p to 364.8p despite a positive note from Shore Capital after the broker visited the supermarket group’s Fresh & Easy business in the US. Analyst Clive Black said:

We return believing that F&E’s ‘new plan’ is making a positive difference and we are materially more confident that it can reach what we deem is a first ‘step to heaven’ of breaking even. More to the point, we assert that the contribution of refitted stores, stronger new outlets and positive operational gearing means that F&E is on a more robust path to contribute to group earnings, so carrying growing implicit investment value; we forecast ‘step 2′, a first full year of profitability, in 2013/14. Step 3, becoming accretive to group return on capital employed, is a longer-term prospect, but progress in steps 1 and 2 build our confidence in such a possibility. Such progress should materially benefit Tesco’s share price; we reiterate our buy recommendation.

Elsewhere Bwin.partygaming was 7.4p better at 110p ahead of first half results on Wednesday. Earlier this month the company was said to be in the sights of a possible predator, with Las Vegas casinos group Wynn Resorts one name mentioned.

Perform, which supplies live sports video, news and data to mobile operators and broadcasters, rose 13.7p to 182.7p after it reported results in line with expectations and gave an upbeat outlook. It made a £2.2m loss in the first six months of the year, but this included £4m of costs associated with its flotation at 260p a share in April and its purchase of In a buy note Patrick Yau at Peel Hunt said:

After a difficult IPO, Perform Group has reported a solid set of interims, with a good start to the second half signalled by management. Operational metrics are all pointing in the right direction and we remain positive on the company’s digital content model with its global opportunities. The shares trade at a premium to most stocks in the media sector, but we expect that the company has done enough to maintain this gap.

Lower down the market, GGG Resources added nearly 8% to 22.5pafter it agreed to end its hostile bid for Australia’s Auzex in favour of a merger of the two companies. The deal brings the Bullabulling gold mine, currently split between the two companies, under sole ownership of the merged business. The other Auzex operations will be demerged. GGG’s broker Collins Stewart said:

This clears the uncertainty surrounding the hostile bid already on the table for Auzex (which will be dropped), allowing the market to refocus attentions on the significant potential at the Bullabulling project. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds