Traders jump at signs of Aviva bid for the Pru

Prudential bagged top spot on the FTSE leaderboard yesterday as the appointment of a new broker renowned for its aggressive defence strategies rekindled takeover speculation.

Prudential shares rose 23p to 576p as traders assumed the appointment of US investment bank Goldman Sachs in place of JPMorgan Cazenove suggested that the insurance company was taking seriously the threat of a bid from Aviva, 13p stronger at 719p.

Market professionals reckoned it was possible to view the appointment from a different angle. They noted that Cazenove was also broker to Aviva and may have decided not to repitch for the Prudential account to avoid a conflict of interest.

It may also be that Cazenove believes Aviva is more likely to do a deal this year. Indeed, Aviva recently held talks with a US insurer called AmerUS and this month revealed it was reviewing "value-driven inorganic growth opportunities" in the world's major savings markets.

All told it was a busy day in the insurance sector. Insurance broker Benfield Group rose 11.75p to 366.75p in heavy volume amid talk that it could be a takeover target for Aon, the world's second-largest insurance broker. However, with 2006 shaping up to be a good year for the insurance industry, traders reckoned any offer would have to be pitched at around 450p a share and they were not sure Aon or anyone else would be prepared to pay that much.

Old Mutual climbed 2.5p to 183.25p on news that its offer for Sweden's Skandia had been declared unconditional. Traders said tracker funds had been buying the stock yesterday as Old Mutual would be reweighted once the deal was completed. Friends Provident rose 4.5p to 194p as its shares, which have lagged the sector in recent weeks, played catch-up.

The strong performance of the insurance sector and gains for Tesco, up 7.25p to 318.75p on rumours - denied by sources close to the company - that it is considering a share buyback, saw leading shares close higher. The final scores showed the FTSE 100 ahead 18.2 points at 5722.6. Meanwhile, the FTSE 250 climbed 23.5 points to 9081.7 and the FTSE Small Cap index added 15.3 points to close at 3449.8.

Northern Rock was among the day's top blue-chip performers. The mortgage lender, which reported strong full-year figures on Wednesday, rose 33.5p to 1014.5p after Merrill Lynch said the shares looked cheap. "A 4% increase in our price objective to £12.14 means that even after the stock's post-results rally we see 25% upside in the share price," it said.

British Airways was also flying high yesterday as the oil price fell and a couple of brokers increased their earnings forecasts ahead of next Friday's results. Goldman Sachs raised its 2005/2006 earnings-per-share forecast to 34.4p from 32.8p, citing strong trading over Christmas. Meanwhile, ABN Amro increased its earnings estimate to 33.8p for much the same reason.

On the downside, cigarette producers Imperial Tobacco, down 34p to 1633p, and Gallaher Group, off 21p at 867p, were under pressure on fears of a price war. Yesterday, Philip Morris slashed the price of Marlboro cigarettes in Spain and traders were worried that the US tobacco company may do the same in other European countries.

Profit-taking ahead of today's trading update saw online gaming group Party Gaming ease 3p to 145.5p, while British Energy's return to the FTSE 100 proved to be something of an anticlimax. Hit by a flurry of profit-taking the nuclear power group's shares closed 18p weaker at 612p.

Away from the blue chips, Aegis, the media buying group in which financier Vincent Bolloré has built a 25.5% stake, rose 5p to 128.5p after Deutsche Bank upgraded its rating on the stock to buy. The German broker suggested earnings could beat current forecasts if Aegis's management improves its operating performance.

HMV firmed 0.75p to 159.25p after Brandes, the US value fund, declared an increased holding in the music and book retailer of 7.3%.

Halfords faded 6p to 335.5p after CVC Capital Partners, a pre-flotation backer, sold 17.1m shares at 336p each. Merrill Lynch did the business on CVC's behalf, placing the stock with a variety of institutions. Traders reckoned Autobacs Seven, the Japanese car parts retailer which has amassed a 5% stake in Halfords, was not among the buyers.

Manganese Bronze, the manufacturer of London's black taxi cabs, stood out among the small caps. Although there was a vague bid story doing the rounds, market professionals attributed its rise of 16p to 213.5p to a series of upbeat institutional presentations at which the company flagged up its Chinese expansion plans.

Oil and gas exploration group Max Petroleum climbed 10.75p to 137.5p - a record high - as traders realised its Astrakhansky licence is close to Lukoil's Severny prospect, which has been described as one of the biggest oil finds of the decade.

Newport Networks firmed 1p to 18.5p on rumours that Nortel Networks is to order one of its session controllers.

Good prognosis

Keep an eye on healthcare diagnostics group Osmetech. That was the word among market professionals last night after a large stock overhang was cleared. Evolution Securities placed 21m shares - around 16% of the company - at 20p on behalf of Motorola with a variety of City institutions and private client brokers. Motorola's shareholding dates back to the summer when it sold its Clinical Micro Sensors business to Osmetech. With the Motorola holding out of the way, traders were expecting the stock to rally this morning. Earlier this week Osmetech, which recently appointed Hoare Govett as its broker, received American regulatory clearance for its cystic fibrosis carrier detection test. Yesterday Osmetech shares lost 4.5p, or 14.5%, to close at 26.25p.