House broker turns on RSA

Another day and another heavy session of trading in the shares of troubled insurance company Royal & SunAlliance, off 0.5p at 86.25p on volume of 90m shares.

Apart from the usual hedge fund activity, yesterday's turnover was boosted by some quite startling advice from ABN Amro, one of RSA's two brokers.

"We advise investors to reduce exposure to Royal & SunAlliance as we anticipate continued pressure on the share price through to the conclusion of the rights issue process."

Even in these post Enron days nobody in the Square Mile really expects analysts to be anything other than positive on corporate clients, especially ones trying to raise £960m to plug a hole in their reserves.

So why is ABN advising its clients to shun the cash call? There are two reasons. First, last week's ruling by a Delaware court against Royal Indemnity Company, a subsidiary of RSA, in a case between the company and Wells Fargo Bank and MBIA Insurance Corporation. Second, rumours that hedge funds have been drafted in to sub-underwrite the cash call.

"We are hearing that hedge funds have sub-underwritten the upcoming rights issue and are now shorting the stock in an attempt to push the price down to a level at which the institutions will decide not to take up their rights," ABN said.

A spokesman for RSA said he could not deny the rumours but said that just because hedge funds had been drafted in did not mean they would end up with stock. This, he said, would be up to shareholders, who have until next Wednesday to decide whether to take up their rights.

However, based on the price of RSA's nil-paid shares, which carry the right to buy one new share for 70p, there is every chance they will. Last night the nil-paid shares closed at 16.75p.

In the wider market, leading shares ended a quiet session little changed as investors decided to pause for breath after three days of big gains.

The final scores showed the FTSE 100 down 3.9 points at 4,270.1, with the banking sector, and Lloyds TSB in particular, responsible for pushing the blue chip index into negative territory. Lloyds shares fell 8.25p to 436p as word began to filter back from an investor day that a dividend cut is not out of the question.

Elsewhere, things were brighter. The FTSE 250 moved up 36 to 5,628.5, while the FTSE Small Cap index climbed 6 to 2,403. Market turnover was average, with about 2.3bn shares changing hands.

In the bond market, gilts bounced back from Friday's battering as traders either moved to buy back short positions or pick up bargains. The benchmark 10-year gilt closed around 125.890, yielding 4,716%.

Back among the blue chips, ITV broadcaster Granada, up 5.25p at 103p, was the biggest riser as traders bet that the government will approve its proposed merger with rival Carlton Communications, 15.75p higher at 181.5p, without too many concessions.

Packaging group Rexam, 12p stronger at 412p, was also in demand as investors rushed to get on the share register before the stock goes ex-dividend on Wednesday. Buyers also came for Cadbury Schweppes, 8p firmer at 385p, after its house broker - ABN Amro - advised its clients to buy ahead of an investor day on October 27.

On the downside, Reuters, the news and financial information group, eased 4p to 229p on concerns that profits could be hit by moves to end the payment of "soft commissions" to fund managers.

Lower down the market, Carphone Warehouse advanced 6.25p to 132p, a two-year high, as investors took positions ahead of tomorrow's second quarter trading update, which will be accompanied by a presentation on TalkTalk - Carphone's fixed-line offering.

Investec Securities expects Carphone to reveal TalkTalk has 150,000 customers, 42,000 more than at the end of July.

Elsewhere in the retail sector, DFS Furniture Group marked time at 412.5p despite speculation that the outlook statement with Thursday's preliminary results could disappoint.

Altium Securities reckons like-for-like sales in the eight weeks since July 30 - the end of DFS's 2003 fiscal year - could be negative.

"Weather will have reduced footfall in August ... more significantly, there was evidence from the industry of lower furniture demand even before the warm weather and we expect this to have negatively impacted order books carried into the new financial year," Altium analyst Geoff Lowery said.

Canary Wharf eased 5.75p to 267.75p, unsettled by Friday's news that chairman Paul Reichmann is considering making an offer for the property group. In August, Mr Reichmann said he would only bid if he thought the other offers on the table were too low.

Among the smaller companies, embattled Lloyd's of London insurance vehicle Goshawk firmed 1p to 30.5p as rumours of a bid approach swirled the market. However, market professionals reckoned the gain had more to do with the fact that Phoenix Asset Management has just acquired a 6% stake in the company.

Rok Property Solutions was marked 11.5p higher at 253.5p, amid suggestions that its interest in housebuilding and construction group Galliford Try, unchanged at 45.5p, has cooled.

Arbuthnot Securities believes Friday's purchase of 75,000 shares by a Rok director on Friday is a signal that the company has given up on Galliford for the time being. "It is hard to believe a bid could be made with a Rok director buying his company's stock and thereby underpinning the share price," the broker said, noting that Rok's indicative 51p-a-share offer for Galliford, which was rejected last week, included a stock component.

Finally on Aim, stockbroking firm Numis Securities held steady at 522.5p despite whispers that it recently recorded its most profitable week ever and has a couple of flotations in the pipeline.