BT bounces on government contract news, but FTSE 100 fades despite US economic stimulus hopes

BT shares were under pressure earlier this week, after Sir Philip Green's report into government waste identified fixed line telecoms as an area where costs could be cut dramatically. The Top Shop entrepreneur said the government's annual spend of more than £2bn could be reduced by 30%-40% if it used its bargaining power effectively.

Investors were worried that this could put pressure on BT's margins, but today the company said it had signed a memorandum of understanding with the government, and all its contracts remained in place. The statement talked about "new arrangements designed to deliver efficiencies" but the key point as far as investors were concerned was BT's insistence that "there is no change to our overall outlook as a result of this agreement."

So BT's shares jumped 4.2p to 147.4p, making it the leading riser in the FTSE 100.

But Cable & Wireless Worldwide, also unsettled by the Green report, fell again today, down 2.45p to 71p as Citigroup reduced its rating from buy to hold. The bank said:

Government spending cuts which led to July's profit warning [from CWW] were unexpected in their severity and so far have not shown up to the same extent at competitors. Near-term uncertainty in public-sector revenues has increased materially. The government's spending review is unlikely to be the last marker with contracts expected to come under continued scrutiny. Near-term news is unlikely to be supportive.

Lower down the market Bob Geldof's media company Ten Alps was also a victim of government cutbacks. Its shares tumbled 5p to 10.5p - a 33% decline - after it revealed the Department of Education had terminated its Teachers TV project. Geldof owns around 5% of the business. Julian Tolley at HB Markets said:

The withdrawal of funding for such a significant part of the group's online TV presence will force a review of the group's business streams. Until the full impact of the move is know the recommendation is cut to hold.

FTSE 100

Global equities eroded early session gains after absorbing a glut of data and comments from Bernanke. After a volatile week, with much to digest, clients erred on the side of caution and reduced positions in equities and futures.

Old Mutual HSBC Standard Chartered

Barclays rose 5.05p to 285p despite analysts at Evolution Securities saying it might need to follow in Standard Chartered's footsteps and raise around £7bn. Evolution's Arturo De Frias Marques said:

Barclays is a survivor and has fared better than many peers during the crisis. However, it is one of the most exposed to regulatory changes as a) UK regulators seem most intent on a tough line with banks and b) the proportion of capital that it allocates to investment banking (66% of its estimated capital in 2012) is the highest in Europe. Until now, we expected Barclays to reach a 25% [dividend] payout quickly but we no longer think this will happen. In our view, the most reasonable strategic option is a "deal cum rights issue".

Back with insurers, Old Mutual was not the only faller as Citigroup moved its recommendation on the sector from neutral to underweight. Standard Life lost 7.6p to 227p while RSA Insurance fell 4.4p to 131.8p. But Resolution rose 2.3p to 253.8p after it said it would pay £102m for Bupa Health Assurance, and said it was still interested in more deals, large and small.

Miners suffered some profit taking, with Xstrata down 30.5p to 1311.5p as it revealed the sale of 102,097 shares at £12.95 by director Benny Levene, the company's chief legal counsel.

Among the mid-caps ITV jumped 3.75p to 66.7p as Morgan Stanley moved from equal weight to overweight and lifted its target price from 66p to 80p. Analyst Patrick Wellington said:

We are more optimistic now on the outlook for sustained advertising growth in the UK in 2011 based on the broadening of the advertising recovery in the second half of 2010 with a number of new sectors (telecoms, finance, autos) now contributing. Nevertheless, with headwinds from Central Office of Information advertising and weaker X Factor scheduling next year, our 2011 ITV Family advertising growth expectation is still just +0.6% (was -0.5%). We believe an appropriate mid cycle multiple for ITV, given its structurally improved position, is 10-13 times. At our price target ITV would trade on a PE of 12.6 times in 2011, dropping to 10.6 times in 2012.

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There was more bad news for Falklands oil companies, just days after shares in Rockhopper Exploration fell sharply after doubts about how many barrels it had found at its Sea Lion well.

Desire Petroleum announced that it had found no oil or gas at its Rachel well in the north Falkland basin. The well will now be sidetracked in the hope of success closer to the mature oil source rock, which will take another 20 days. The Rachel well was the first in a proposed four well drilling programme, and Rockhopper again enters the picture since it has a 7.5% working interest. Desire shares dropped 39.25p to 70.5p on the news - a 36% decline - while Rockhopper lost 47.5p to 293p. Rockhopper is expected to raise more funds to continue development in the area.

Overall the market ended the week on a negative note. The finished 23.84 points lower at 5703.37 despite US Federal Reserve chairman Ben Bernanke confirming that more quantitative easing was on the way, which analysts said would probably be unveiled at its November 3 meeting. Giles Watts, head of equities at City Index said: was the biggest faller in the leading index, down 6.9p to 138.3p as pulled out of negotiations to buy its Nedbank subsidiary for around £5bn. Analysts said , previously suggested as another bidder for Nedbank, was unlikely to return since it had said its £3.3bn cash raising this week was not designed as an acquisition warchest. HSBC fell 9p to 653.3p while Standard added 11.5p to 1899.5p. Evolution repeated its sell rating and cut its target price from 298p to 260p. Lower down the market added 2.25p to 47.5p on vague talk of a possible 56p a share bid from US group Harrah's.