Financials led Britain's top share index lower on Wednesday, on concerns that deeply-divided US lawmakers would fail to agree to a deal to avoid a default on the country's debts. The UK benchmark index closed 73.15 points, or 1.2 percent lower at 5,856.58, albeit in thin volumes. The continued stand-off by US politicians has prompted fund managers to steer clear of equities.
Republican and Democratic leaders are scrambling to find common ground before August 2, when the government is expected to hit its $14.3 trillion (8.72 trillion pounds) borrowing limit that could trigger a default and roil world markets. A vote on a deficit plan by Republican Speaker John Boehner was pushed back to Thursday from Wednesday. Credit Suisse said in a note that it sees the United States raising its debt ceiling by August 2, but expects the bulk of key decisions being left until after the 2012 elections.
The bank said a failure by the world's biggest economy to raise its debt ceiling could take up to 1 percent off its GDP and see equity markets fall up to 15 percent, while default could see GDP fall by 5 percent and equities up to 30 percent. Banks and insurers, companies seen to have the largest exposure to the debt crisis, bore the brunt of the selling.
Goldman Sachs downgraded its recommendation on European banks to "neutral" from "overweight", citing stresses placed on the sector from the ongoing eurozone debt troubles. "Domestic banks in Europe are likely to face a slow growth environment, but many of the global banks have stronger balance sheets, diversified income streams and should benefit from their exposure to fast growing economies," it said in a note.
UK-focused Lloyd's Banking Group, Barclays and Royal Bank of Scotland all fell up to 4.2 percent, partly a response to disappointing results from Spain's Banco Santander.
The three UK banks have already unveiled more than 5 billion pounds ($8.1 billion) of charges to cover compensation for PPI mis-selling. Sovereign debt worries prompted punters to turn to traditional safe havens to protect their returns such as silver and gold, which soared to another record high. That has helped miners such as Fresnillo and Randgold outperform the broader market as investors have used them as a proxy for the precious metals.
Meanwhile, Lonmin gained 1.3 percent after Credit Suisse upgraded its rating on the platinum miner to "neutral" from "underperform", citing valuation grounds. Other miners and integrated oil stocks, however, fell. Poor macroeconomic data from the US added to investor unease, with Wall Street lower as the UK market closed. New orders for long-lasting US manufactured goods fell unexpectedly in June, while applications for US home mortgages slipped last week, a blow for those hoping to see signs of a recovery in the economy.
Ex-dividend factors accounted for fall in London blue chip firms Scottish & Southern Energy and Investec, which both lost their payout attractions. BT Group shed 2.5 percent ahead of an update on Thursday, one of many stocks due to report in the next session including AstraZeneca, Centrica , Rolls Royce and Shire.
On the upside, Autonomy Corp rose 3.9 percent after the software firm said it sees fourth-quarter profits beating the current view, as it unveiled above-forecast second-quarter earnings. Sage Group climbed 1.6 percent after the accounting software firm issued an in-line trading update. And ITV added 1.3 percent as the broadcaster reported a 45 percent rise in earnings in the first-half and returned to paying dividends.