Britain's leading share index fell 2.4 percent on Tuesday, retreating for the fourth day in a row, as banks and commodity stocks tumbled on concerns over a worsening global recession. Credit rating agency Moody's Investors Service said the recession in emerging European economies would be more severe than elsewhere due to large imbalances and would put the financial strength ratings of local banks and western parents under pressure.
Standard & Poor's, another rating agency, said the growing difficulties faced by Western banks in supplying their subsidiaries in emerging Europe with funding could prompt an overall ratings review for the region's banks. The FTSE 100 closed down 100.62 points at 4,034.13, after losing 1.3 percent on Monday. The UK benchmark is down 9 percent so far this year after falling more than 31 percent in 2008.
Banks took the most points off the index, pressured by a 6.8 percent fall from index heavyweight HSBC after Morgan Stanley said it was staying "underweight" on the stock and becoming more bearish on the outlook for profit in 2009 and 2010. Barclays, Lloyds Banking Group and Standard Chartered lost between 0.5 and 8.9 percent.
"The only positive we can take from it is that we manage to close above 4,000. We sort of dipped below 4,000. It does seem as though we have some support," said Martin Slaney, head of derivatives at GFT Global Markets. Slaney added the market would remain under pressure as there were still no concrete details from any central banks, particularly the US, as to the likely creation of a toxic bank or any co-ordinated action to deal with toxic assets.
British inflation fell much less than expected in January, but the surprisingly strong figures should not stand in the way of further monetary policy easing from the Bank of England. Sterling bounced off two-week lows against the dollar, but gains were capped by investor risk aversion that gave a broad boost to the dollar. Also in the financial sector, Prudential shed 5.3 percent ahead of its new business numbers due on Friday.
Legal & General, on the other hand, was among the 10 gainers on the UK index, up 2.3 percent and recovering some of Monday's 10.5 percent fall on market talk that it may be forced to launch a rights issue or cut its dividend. The insurer said on Monday it had no plans to raise capital or cut its dividend. Real estate group Land Securities was among the top losers on the FTSE 100, down 8.5 percent after confirming on Monday that it was considering a rights issue.
Other property blue chips also fell, reflecting the gloomy economic picture, with Hammerson, Liberty International and British Land losing 3 to 9.3 percent. Oil and gas producers were also standout losers as crude prices fell. BP, Royal Dutch Shell, Tullow Oil and Cairn Energy sagged 0.5 to 3.1 percent. BG Group slipped 1.8 percent after the company raised its bid for coal-seam gas explorer Pure Energy Resources by 25 percent to A$995 million ($646 million), trumping a rival bid by Arrow Energy.
Soft base metal prices also weighed on mining stocks, with Kazakhmys, Eurasian Natural Resources, Xstrata, Anglo American, BHP Billiton and Vedanta Resources falling 4.5 to 8.9 percent. Randgold, however, rose 7.5 percent as investors sought safety in gold, pushing the yellow metal higher. InterContinental Hotels was up 2.6 percent after its full year results met forecasts despite strong headwinds in the sector.
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