Bank of Japan sets tone by leaving policy unchanged, while growth worries hit mining shares
Leading shares fell sharply again on worries that central banks could be about to start turning off the money taps, the key support for markets in recent months.
News that the Bank of Japan had, against some expectations, kept monetary policy on hold set the tone and pushed the yen higher against the dollar. Then came talk that the US Federal Reserve might take the opportunity at next week's scheduled meeting to begin easing off its bond buying programme.
On top of that, eurozone woes returned, with Greece's failed privatisation on Monday and a German court hearing on the legality of the European Central Bank's bond buying plan to support the euro. Continued violence in Turkey did not help sentiment.
But shares recovered from their worst levels, and the FTSE 100 closed down 60.37 points lower at 6340.08 having fallen as low as 6280.
Miners were among the leading fallers on concerns about global economic growth, particularly in China. Evraz, due to be ejected from the FTSE 100 when this week's reshuffle is announced, fell 7.3p to 117.3p while Polymetal, also expected to be demoted to the FTSE 250, was down 27p at 617p.
Fresnillo fell 42p to £10.76 after Citigroup cut its target price from £11.20 to £10.45 with a sell rating, despite a recent site visit showing "impressive progress". The bank said:
Management is delivering on goals, transparent and shareholder focused. We have maintained for some time that Fresnillo is best-in-class among UK precious metals miners, but our bearish view on silver and our concerns about its limited free float causing excessively high valuations means we rate Fresnillo as sell.
Glencore Xstrata dipped 11.8p to 302.5p on talk it was considering combining its coal assets with those of Rio Tinto, down 37.5p at 2702.5p.
Fund management groups were under pressure again as markets headed lower, with Aberdeen Asset Management down 18.3p to 395.8p and Man dropped 6.6p to 86.25p.
Catering group Compass closed 17.5p lower at 838p as Goldman Sachs moved from buy to neutral, saying:
While we see Compass' strong organic growth, low revenue volatility, low capital intensity, and strong balance sheet as attractive, we now see more upside potential elsewhere in our sector coverage.
But Rolls-Royce rose 6p to £11.87 as Exane BNP Paribas issued an outperform rating and raised its target price from £10.75 to £13.40. It said:
Rolls-Royce shares are at a record high. Paradoxically, some investors seem to be questioning free cash flow conversion, which is close to an all-time low. We expect a strong upswing in cash generation from 2014 as Rolls-Royce's fleet in civil aerospace matures. This, coupled with the safety of Rolls' earnings and the upside from much more generous dividends, should result in further re-rating.
Tullow Oil added 5p to £10.17 after a positive note from Bank of America Merrill Lynch. The bank said:
We reiterate our buy rating and price objective/net asset value of 1,570p, offering around 60% upside potential, post a significant de-rating and ahead of imminent catalysts. A series of disappointing exploration wells since October 2012 have resulted in a 33% pullback; below 1,000p for the first time since August 2011. Now trading at our core plus development net asset value and with three well catalysts upcoming, we believe it offers a very attractive entry point.
Among the mid-caps, online grocer Ocado jumped 13p to 325p as investors shorting the shares continued to close their positions, hurt by the company's recent revival. There was also a smattering of revived takeover speculation, with Marks & Spencer mentioned once more.
FirstGroup has received a boost on the same day its shares began trading for the first time without entitlement to its £615m rights issue.
The bus and train group is raising the cash from shareholders to cut its borrowings and to invest in its future growth, with a 3 for 2 rights issue at 85p a share. Investors have until 25 June to decide whether or not to take up their entitlement.
From Monday's close - adjusting for the ex-rights - its shares dipped around 1p to 99.6p. And Investec has become more positive on the group and has moved its recommendation from hold to add. Analyst John Lawson said:
FirstGroup will shortly put its balance sheet issue to bed (for now) and, whilst the final outcome of the rights issue will not be known for another two weeks, investors should at long last begin to focus on the recovery story (especially in student and UK bus), instead of fretting about the group's finances. If everything goes to plan (the turnaround and the fund raising), then the present share price looks a good entry point. We move to add with an adjusted sum of the parts based target price of 110p.
Finally TEG, the green technology company which develops and operates organic composting and energy plants, added 2% to 6.125p after announcing the award of a contract by Nottingham City Council. The three year contract with the option of a further two years is for green waste composting, and revenues will be up to £1.3m over the first period of the deal.
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