Fears about inflation and the outlook for the dollar sent world markets tumbling as investors pulled cash out of economy-sensitive investments. Mining companies such as BHP Billiton dragged London benchmarks to their worst two-day performance of the bull run.
The FTSE 100 index finished lower by 70.8 at 5841.3, its weakest close since March 6. It had crashed 2.6 per cent in the opening hour, shedding as much as 156.7 points to register its sharpest intraday fall since the London bombings, until a a modest dollar rebound and a firmer tone on Wall Street helped gird buyers.
Since hitting a six-year closing high of 6132.7 just under a month ago, the blue-chip measure has tumbled by nearly 5 per cent. Its latest two-day drop of 225 points -- the sharpest since September 2002 -- brought back memories of Black Monday, October 1987, when the FTSE's previous three-year bull run ended with a 20 per cent drop within two sessions.
Worldwide equity markets told a similar story: the FTSEurofirst index of 300 European shares lost 1.2 per cent to clock up its worst two-session decline since September 2002. Germany’s DAX slipped 2.3 per cent and France’s CAC sank 1.6 per cent.
But Wall Street steadied for the first day in three, with the Dow Jones Industrial Average holding level at around 11388 against last week's 197-point decline. Data showing a slowdown in New York manufacturing activity helped brighten the outlook for interest rates, as did a sharp drop in the price of oil.
For an overview of world markets, click here.
The recent stock market tailspin has been triggered by concern that a weakening dollar will hurt exporters and slow economic expansion. The greenback today reached an eight-month against the yen and traded at one-year lows versus the euro and sterling, then bounced as investors switched out of riskier, high-yielding assets.
"The continued sell-off in the dollar may well be approaching levels at which it starts to have implications for growth and (interest rate) policy," said Neville Hill, head of European economics at Credit Suisse. A 10 per cent strengthening of the euro would hit euro area expansion by around 0.8 percentage points, he estimated.
One of the factors hitting the dollar has been a rapid worsening of America's current account deficit, which came as US companies built stockpiles of raw materials. Recent monthly data from the Institute for Supply Management showed manufacturing inventories at their highest in 18 years, even though there has been no sign of an upturn in orders. The stockpiling has also pushed metals prices to record levels, feeding worries about inflation in the world's biggest economy.
"The spike in metal prices and the decline in the dollar may prove to be temporary if underlying US demand fails to quicken," said SocGen in a research note. "In fact, US manufacturing firms are seeing no acceleration in new orders, and the risk is that order books may actually deteriorate over the coming months."
Worries about inflation and slower spending were further exacerbated by Friday's University of Michigan consumer sentiment survey, which provided its worst reading since Hurricane Katrina because of rising fuel and mortgage costs. There have also been signs that the US property market is being cooled by higher interest rates: existing home price inflation has halved, and new home prices are lower than a year ago.
"In recent years, whenever US house price inflation has slowed, equity withdrawal has faltered, consumer firepower has subsequently grown less rapidly and retail sales growth has weakened," SocGen argued. "With house prices no longer rising rapidly, US consumers are unlikely to borrow more cash this year than they borrowed last year, and US consumer firepower will lose the big boost that it has received in recent years."
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Natural resources companies paced the FTSE 100's loserboard for a second session, having led it higher for the best part of three years. Copper miners Kazakhmys slid £1.11 to £12.04 and Antofagasta lost £1.69 to £22.73, while diversified peer BHP Billiton eased 41p to £11.27.
The sector weakness came as future prices tumbled on worries that higher borrowing costs will choke economic growth: zinc lost around 10 per cent, copper fell 9 per cent and gold, a traditional hedge against inflation, slipped 3 per cent.
While metals prices had been testing new highs before today, some London Metals Exchange jobbers have become concerned that trading volumes have fallen dramatically. The main support, they claim, has come from a handful of major investors trying to close out unprofitable short positions in an illiquid market. Moreover, recent volatility has reportedly scared off some of the speculators whose appetite had pushed prices out of whack with supply and demand fundamentals.
Xstrata fell £2.02 to £22.08 as traders awaited news of its next move in the Canadian takeover merry-go-round. The Anglo-Swiss group said it was still reviewing its options over its 20 per cent stake in Canada’s Falconbridge -- which is subject to a raised bid from compatriot Inco, which itself is a hostile target for Vancouver-based nickel producer Teck Cominco.
As of today, Xstrata will no longer have to pay a top-up fee to Brookfield Asset Management, the firm that sold Xstrata its stake in Falconbridge. According to The Sunday Times, JP Morgan and Deutsche Bank are assisting Xstrata in a £9.5 billion bid -- a price tag some shareholders worry may require an equity issue.
Read the Sunday Times story here.
Anglo American, which the Sunday Times claimed has looked at the possibility of merging with Xstrata, dropped £1.69 to £22.73. Rio Tinto, rumoured to be investigating a possible bid for US peer Phelps Dodge, lost £1.54p to £30.28.
Among the energy companies, BG Group weakened 13.5p to 691p and BP gave up 13.5p to 646p. New York's crude was around $69.80 a barrel, down more than $2 on yesterday's European close in tandem with the commodities. The International Energy Agency on Friday cut its oil demand growth forecasts for this year due to stretched affordability.
Track today's trading by industry sector here.
Dollar earners were the other main victims of the selloff: Wolseley, the world's biggest plumbing supplies group, weakened 47p to £12.42 and aggregates maker Hanson, lost 24.5p to 692. Software maker Sage Group ended lower by 6.5p to 240.5p.
ABN Amro cut its rating on Sage to "hold" from "buy" this morning, on worries about its strategy rather than its forex position. The Dutch broker told clients: First, we feel the company is facing increasing competitive pressure from Intuit and Microsoft in the USA. Second, this phenomenon could spread to other geographies as software majors like SAP start to target the mid-market more aggressively. Third, we have growing concerns about Sage’s recent acquisition strategy of targeting Business Process Outsourcing companies outside its core accounting and Consumer Relationship Management activities."
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Elsewhere among the fallers, AstraZeneca slid 7p to £28.50 after it agreed to buy Cambridge Antibody Technology in a £702 million deal. CAT shares soared £5.08 to £12.99, at a small discount to AstraZeneca's agreed price of £13.20 apiece.
AstraZeneca, which already owns 19.2 per cent of CAT from a research deal agreed two years ago, said buying the rest of the stock would cost it £567 million and would not alter its earnings guidance for this year. But, with CAT currently lossmaking and having a big future research requirement to bring drugs to market, there was still some trimming of AstraZeneca's forward numbers.
Analysts also worried that, while CAT offers AstraZeneca possibilities in some high-growth areas such as oncology and multiple sclerosis, it may not provide too much in the way of near-term returns. Of the Cambridge-based firm's ten products in clinical trials, six are in Phase II and four are in Phase I.
"While this is the sort of deal that we believe AstraZeneca needs to do to rebuild its pipeline, we highlight that it by no means solves the company’s problems of a weak late stage pipeline and highlights the cost of rebuilding the pipeline," said Merrill Lynch.
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BT Group was among the select band of blue chip stocks to rise. The gain came in anticipation of BT's full-year results due May 18, where some investors hope to see a reduced pension deficit and more generous shareholder returns. Well-worn speculation of a private equity interest was also provided a small, if unsubstantiated, fillip.
Cazenove, one of BT's own stockbrokers, told clients that the results should be "robust". It forecasts operating earnings to grow for the first time in about ten quarters -- although whether investors will be prepared to take that as an portent for the current year, as rivals such as Carphone Warehouse step up their challenge, remains to be seen.
Analysts also doubted whether BT would be ready to change its dividend policy or consider restructuring its balance sheet: "we expect management to keep its powder dry," said Dresdner Kleinwort.
BT shares ended the session up 5.5p to 216p, the top FTSE performer. Track them here.
Other gainers included National Grid, which took on 8.5p to 660.5p after Dresdner Kleinwort upgraded to "add" from "hold" on valuation grounds. The utility prints full-year results on May 18.
"National Grid remains a solid company making good returns on its regulated business, we believe the share price reaction to the recent rise in bond yields has been overdone," said the broker. "We expect full-year results to be driven by continued residential volume growth in the US and cost cutting. Favourable weather effects are expected to offset the under recovery of US commodity costs."
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Vodafone was another share to beat the drop, firming 1.5p to 125.25p on reports that partner Verizon is poised to buy Vodafone’s minority stake in their US joint venture for about $48 billion. That would be nearer to the $50 billion at which Vodafone is thought to value the Verizon Wireless shareholding, although the deal will also reportedly include taking on debts of $8 billion.
Separately, Swiss broker UBS raised its price target on Vodafone shares to 153p from 145p and retained "buy" advice in a preview of the mobile group's trading update due on May 30. It was positive on the possibility of Vodafone bidding for Vivendi's stake in SFR, although saw no urgency from either side of the deal.
For detailed information on Vodafone, click here.
Catering equipment firm Enodis, a strong performer on Friday, added a further 24p to 199.5p after it rejected an £800 million bid approach from US peer The Middleby Corporation.
Enodis said the 195p per share offer from Middleby "significantly undervalued" the company and its prospects. The bid was pitched at about 23 times current-year earnings expectations -- a valuation stock watchers considered a little mean considering the group's growth record.
United Technologies has been suggested as another possible predator.
Enodis also brought forward its interim results, which were ahead of City forecasts. Shares were up 8 per cent to £254 million and profit before tax and exceptionals grew 26 per cent to £24.4 million, thanks in the main to demand for in-store chiller cabinets.
Read Enodis's statement here.
Insurance broker Jardine Lloyd Thompson fell 14p to 367.5p amid talk it is close to buying unlisted rival Heath Lambert for around £130 million, with any deal being funded with a share issue. Neither Jardine nor Heath Lambert would comment.
For detailed information on Jardine, click here.
ISoft lost 0.75p to 94.25p as rumours swirled that the healthcare software maker is preparing to cut as many as 850 jobs in the UK. The crisis-hit group has 3500 employees, with about a third of those based in India.
ISoft has issued two profits warnings this year because of delays in delivering a National Health Service computer system. That, along with the possibility that previous results are restated, has lead some analysts to worry that ISoft may nudge its debt covenants -- a concern the company has dismissed.
Cutting 37 per cent of its core project staff, as has been rumoured inside the trade, could potentially save ISoft around £38 million, but would also likely need a one-off charge that may not fit into the group's current debt facilities. A cut of that depth would also suggest that the NHS contract negotiations are unlikely to have a happy ending.
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Advertising buyer Aegis inched up 0.25p to 135.25p on talk that Vincent Bollore, chairman of Havas, is close to agreeing that his cohorts take seats the UK group's board. That comes as Mr Bollore consolidated his position as Aegis's biggest shareholder, buying just under 4.98 million shares to lift his stake to 26.56 per cent from 26 per cent.
Aegis will announce a deal with Groupe Bollore at its annual general meeting on May 28, according to gossip coming out of Paris. The strategy is similar to Mr Bollore's involvement with Havas, where he used an equity holding to lever board seats, then took full control of the company.
On broker watch:
Morgan Stanley downgraded Wood Group to "underweight" from "equal weight".
Teather & Greenwood raised BSkyB, Kensington Group and Xaar to "buy" from "hold".
Numis raised Morgan Sindall and Constain to "add" from "hold", and moved Galliford Try in the opposite direction. It also lifted Ceres Power to "add" from "hold".
And SocGen cut BAE Systems to "sell" from "hold".
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