Britain's top share index closed 2.8 percent lower on Wednesday, ending a six-day winning streak, as sliding oil and metal prices knocked commodity stocks, with BP also hit by worries about its earnings outlook. The FTSE 100 closed down 131.41 points at 4,507.51, after rising 10 percent in the previous six sessions.
"I wouldn't read too much into the rally over the last couple of weeks, so I won't read too much into this fall," said Graham Secker, UK equity strategist at Morgan Stanley. "Investors are struggling to decipher the positives and negatives and work out which side to fall down on." US ADP data which showed private employers shed 693,000 employers weighed on sentiment, dragging stocks lower in Europe and the US
BP shares fell by 5.6 percent following rumours the oil major was telling analysts that its fourth quarter earnings would be lower than expected, three dealers said. The company denied the rumours. But the wider sector was also dented as crude prices dipped more than 7 percent after a US government report showed inventories of crude rise much more than expected in the world's biggest energy consumer.
Royal Dutch Shell, Tullow Oil, Cairn Energy and BG Group fell between 3.3 and 8.4 percent. Lower metal prices dragged miners lower with BHP Billiton, Anglo American, Vedanta Resources, Rio Tinto down between 5.8 and 8 percent. The British index's heavy weighting in commodity stocks - above 30 percent - has resulted in its underperformance against its European peers.
Banks added to the losses, with Standard Chartered Bank, Royal Bank of Scotland and HSBC sliding between 2.2 and 7.9 percent. Man Group was the index's heaviest loser, falling 9.4 percent after UBS downgraded the hedge fund manager to "sell" from "buy" and took a cautious stance ahead of a trading statement. However private equity firm 3i was the top performer, gaining 5.9 percent and adding to sharp gains on Tuesday on bargain hunter interest.
The Bank of England began its two-day rate policy meeting on Wednesday and is due to announce its interest rate decision on Thursday. A Reuters poll forecast the central bank would cut rates by 50 basis points to 1.5 percent. Britain's Chancellor Alistair Darling said the UK was "far from through" the recession and that achieving economic recovery was a long way from completion.
Marks & Spencer climbed 2.2 percent as investors were relieved the retailer's trading update was not as bad as expected. The iconic retailer reported its worst quarterly sales performance for a decade and said it would cut around 1,320 jobs to save money in a tough trading environment.
Other retail stocks were mixed. Tesco added 1.4 percent while Home Retail Group fell 1.1 percent and Kingfisher and Next lost 5.6 and 2 percent respectively. "We saw with Next yesterday what's really a poor trading (performance) had already been fully discounted, fully expected and the shares rose strongly. (It is) pretty much the same with Marks & Spencer," said Jim Wood-Smith, head of research at Williams De Broe.
"With a trading statement that was actually dreadful, the market was expecting something slightly worse than dreadful, so it's already factored in, the shares have bounced on the back of it." Underlining the grim outlook for retailers and the wider economy, data showed that new car sales in Britain fell more than one fifth year-on-year in December to cap the worst year for the industry in more than a decade.