The FTSE 100 index of Britain's biggest shares ended down 1.7 percent on Monday, as embattled lender Northern Rock pulled financials deep into the red for a third session in a row. Northern Rock lost 35.5 percent and its peer Alliance & Leicester slid 31.3 percent, falling sharply towards the end of trade.
Analysts noted that its balance sheet was a similar size to that of Northern Rock. Unlike Northern Rock, Alliance & Leicester said it had not sought assistance from the Bank of England, adding that it saw no reason for the share price fall. The UK's main share index was 106.5 points lower at 6,182.8 with many traders looking to the Federal Reserve's decision on US interest rates on Tuesday - when it is widely expected to lower rates.
The Federal Reserve has not lowered rates by more than 0.25 percentage points at a single meeting in almost five years, but this time some analysts feel a deeper cut is needed to help with the present subprime lending crisis.
In the UK Northern Rock again dominated the session on Monday as ripples from its decision on Friday to arrange emergency funding from the Bank of England continued to hit shares.
Thousands of customers withdrew savings from Britain's fifth-biggest mortgage lender and brokers downgraded the stock, which fell 35.5 percent to extend similar losses on Friday.
"Although the FTSE 100 staged a recovery off an initially stronger start to Wall Street, the UK index is still languishing around 100 points down," said David Jones, chief market analyst at CMC Markets. "Today's UK market has once again been about Northern Rock, with the share price of the beleaguered mortgage bank down by more than 30 percent as the rush by savers to withdraw money continues to fuel something of a panic and keep sentiment negative." Alliance & Leicester and Bradford & Bingley were also hurt by downgrades from Citigroup to "sell" from "hold".
Royal Bank of Scotland also said in a note that neither Alliance & Leicester nor Bradford & Bingley was as exposed as Northern Rock to wholesale funding but added that Alliance & Leicester had a similar-sized balance sheet with a large block of treasury assets. Royal Bank of Scotland dropped 4.3 percent after ABN Amro's chief executive said late on Sunday that the RBS-led consortium would most likely buy the Dutch bank as the value of the rival Barclays offer for ABN had little chance of matching the consortium's bid.
Barclays lost 2.5 percent. Housebuilders also suffered from the credit crunch, with Barratt Development and Persimmon down 7.3 and 6.9 percent, respectively. Merrill Lynch also downgraded seven real estate companies, saying it was unwise to be too aggressive on rental growth for London offices and pencilled in flat rents in 2008. The brokerage cut its rating on Minerva to "sell" from "buy".
Its shares lost 16.3 percent. In other news, a series of interviews by former Federal Reserve Chairman Alan Greenspan on global economies dampened the UK markets' mood further, market watchers said. "With the interest rate decision due out from the US tomorrow evening and the ongoing worries of the credit crunch still at the forefront of investors minds - the market volatility is expected to continue," said CMC's Jones.
SAGE AHEAD OF PACK: Shares in Sage Group, Britain's biggest software firm, added 2.8 percent to top the FTSE 100 leaderboard as traders cited vague bid talk. Sage declined to comment on the market speculation. "The reason for Sage's rise is being attributed to bid rumours, with no names being mentioned," said one trader.
SABMiller was flat after ING raised its price target for five European brewers, saying the beer companies could create more value than those in the spirits business due to strong trends in premiumisation, growth in emerging markets and cost-cutting measures.
Diageo added 0.4 percent. In commodities, US crude oil shrugged off early losses to rise above $79 a barrel, within sight of its record high, as the market focused on the Fed meeting on Tuesday. BP lost 0.4 percent and Royal Dutch Shell eased 0.8 percent. (Additional reporting by Dominic Lau).