Retail sector declines fail to dampen City sentiment

The New Year rally continued on the FTSE 100 Index yesterday despite hefty falls for retailers amid concerns over the year ahead.

London's Footsie gained another 22.16 points to 5522.50, building on Monday's 1.6 per cent surge that took it to levels not seen for 16 months.

A flurry of upgrades for financial firms offset woes in the retail sector after stronger than expected Christmas sales figures from Next and rival John Lewis were overshadowed by cautious comments on 2010 trading.

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But there was a more subdued start to trading on Wall Street after reports on factory orders and housing gave mixed signals about the US economy.

Stocks declined after the National Association of Realtors said pending home sales broke a nine-month streak of gains to fall 16 per cent in November, a far sharper drop than had been expected.

The housing number was partially offset by the government's report that new factory orders rose 1.1 per cent in November, their third straight monthly increase. The data suggested the manufacturing sector would continue to support an overall economic recovery.

In currency news, the pound was down marginally against most major currencies as sterling was knocked by talk of a pull-back in demand for gilts once the Bank of England's quantitative easing programme ends.

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Next was among the Footsie's heaviest hit retail stocks even though it hiked profit forecasts following like-for-like sales growth of 3.2 per cent in the 22 weeks to December 24.

The recent trading boost was more than offset by its comments that it expected a tough 2010 as efforts to address the UK's public finances threatened a consumer recovery.

Next shares fell 39p to 2100p, while Marks & Spencer dropped 71/2p to 4047/8p ahead of its own trading update today. Supermarkets were likewise suffering in advance of Sainsbury's figures due tomorrow. Sainsbury's shares fell 41/4p to 3197/8p and Tesco dropped 8p to 4201/2p.

In the second tier, retailers were also under pressure, with Currys owner DSG International down 7/8p to 37p and HMV 11/4p cheaper at 951/8p.

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Back in the top flight, Royal Bank of Scotland rose more than 10 per cent, or 31/4p, to 353/8p as the part-nationalised bank surged for a second successive session.

Sentiment has been boosted by positive broker comments, particularly from Exane BNP Paribas after it said better economic conditions should attract investors on a fundamental rather than speculative basis.

Other banks on the front foot included Barclays, which climbed 171/2p to 2981/8p, while Lloyds Banking Group added 13/4p to 54p. Hedge fund giant Man Group meanwhile was 127/8p ahead at 3251/4p after brokers at Nomura urged investors to buy in.

However, Cadbury was 3 per cent lower after Swiss rival Nestle confirmed it was not planning a bid and as Kraft's 10.2bn proposal received a major setback.

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While US company Kraft announced plans to increase the cash element of its takeover, it was dealt a blow after its biggest shareholder voiced concern.

Berkshire Hathaway, headed by billionaire investor Warren Buffett, voted against Kraft's proposal to issue new shares for the takeover amid fears it would give Kraft a blank cheque to change its offer for Cadbury "in any way it wishes".

Cadbury shares fell 26p to stand at 779p.

The biggest Footsie risers were RBS, Barclays, Man Group and British Airways closed 63/4p higher at 1977/8p.