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Money Marketing Markets: The UK high street massacre

The FTSE 100 looks set to end the week above the landmark 6,000 barrier despite the wealth of evidence pointing to an economic slowdown.

The blue chip index was trading at 6,046 by mid-afternoon Friday after a modest start to the week.

The FTSE was in the red on Monday amid high street doom and gloom and further bad news from the US banking sector.

The British Retail Consortium reported that high street sales fell in March for the first time in two years, down 1.6 per cent on the same period last year.

Next, Kingfisher, Marks & Spencer and Mothercare all slid on the news.

Last week, BHS boss Philip Green said the market was as tough as it has ever been, while DSG International issued its second profit warning in three months.

F&C stewardship income and growth funds manager Ted Scott says: “I think the retail sales figures and last week’s negative Halifax house price survey confirm that the UK economy is slowing pretty fast and it is getting increasingly tough for the consumer.”

“It is not surprising because although headline inflation may be at 2.5 per cent, underlying inflation, with the rises in food and energy costs, is probably between 5-10 per cent and at the same time credit and mortgages are becoming less available.”

Debenhams and Carphone Warehouse have also been feeling the pinch with both reporting weaker profits this week.

The FTSE fell by 63.9 points to 5,831.6 on the Monday with news that Wachovia, the fourth largest US bank, was forced to raise $3.5bn in emergency funding putting pressure on UK banks.

These losses were recovered on Tuesday as the index put on 75.3 points on the back of strong results from Tesco, Astra¹s deal with Ranbaxy and BG Group reporting a new oil find.

The three alone added over 27 points to the FTSE with the banks also making up some of their losses from the previous day.

Continued commodity price strength and heavy bid speculation on the Wednesday saw the miners drive the index up, accounting for almost a third of the day’s 139.3 rise. This saw it back through the 6,000 barrier at 6,046.2.

“There is a lot of cash washing round the sector,” says Colin McLean, managing director of SVM Asset Management. “It will be interesting to see if any of the big deals are consummated.”

Wednesday’s speculation centred upon hopes BHP Billiton might raise its offer for Rio Tinto.

“If BHP want to the Rio board to recommend the deal to shareholders it will have to raise its offer and maybe introduce a cash element to the currently all paper offer,” Scott says.

McLean believes Anglo American and Antofagasta are also potential bid targets.

Banks also helped underpin Wednesday’s surge on the hopes that the Bank of England would take on mortgage loans as collateral.

News that Merrill’s is to cut 4,000 jobs including 400 in the City undermined confidence in the sector on Thursday, while another profit warning, this time from catalogue company Findel, led the retailers down.

The focus remained on financials on Friday with speculation mounting that Royal Bank of Scotland is to launch a massive £10bn-12bn rights issue to shore up its capital ratios. This comes despite past denials from chief executive Sir Fred Goodwin

“The dividend yields on most of the banks are so high, which is the market’s way of telling them to cut their dividends,” McLean says. “The rights issue will be taken reasonably well, despite Goodwin being on record saying it wasn’t needed, because it will reduce some of the risks.”

Scott notes that it is RBS’s AGM next week and the lack of any official denials this time around means it is likely to be pushed through.

“The City has known for months that RBS needs to raise capital. It has the lowest capital ratios in the sector, partly because of its acquisition of ABN Amro,” he says. “If they have a rights issue they will probably halve the dividend and I think you will probably see most of the banks, except HSBC etc, follow suit.”

The move will result in some reputational damage, Scott says, but he is not convinced heads will roll. Daniel Bouton, chief executive at SocGen became the latest in an increasingly long line of casualties this week but don’t expect him to be the last.

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