Lack of action from European Central Bank helps push markets lower, with Barclays under pressure after stake sale
Banks led the way lower as markets continued their recent decline, mainly thanks to disappointment with the latest pronouncements from European Central Bank chief Mario Draghi.
Barclays fell 13p to 303.3p as Japan's Sumitomo Mitsui Banking Corporation sold half its shareholding in the bank, 84.5m shares at around 308.5p in an offering to institutional shareholders by Nomura. At that price the stake is worth around £260m.
Sumitomo paid around 296p a share for 169m shares, or 1.31%, in 2008 as part of a number of fundraisings by Barclays amid the financial crisis.
Standard Chartered was also under pressure, down 50p to £14.48 while Royal Bank of Scotland ended 11.5p lower at 316.9p.
Overall the FTSE 100 lost its early gains to close 83.20 points down at 6336.11, its lowest level since 22 April.
The admission by the IMF that it made mistakes in the Greek bailout set a downbeat tone for the day, while the continuing political protests in Turkey sent that country's market sharply lower.
Meanwhile any investors hoping for further stimulus measures from the Bank of England or European Central Bank were disappointed. Indeed, the ECB's lack of action, its downgrade to this year's growth forecasts and an unimpressive performance from Draghi at its press conference was one of the main factors behind the market decline. Annalisa Piazza at Newedge Strategy said:
[The] ECB press conference suggests that - although no policy action has been taken - the ECB is still discussing on future policy steps. The market reaction (sell-off) doesn't seem to be justified by any hawkish comments but more by the doubts that the ECB is really ready to act anytime soon.
All eyes will now be on the US non-farm payroll numbers on Friday. William Nicholls, a dealer at Capital Spreads said:
The markets are in one of those moods whereby regardless of what the non-farm payroll number is, equities might only go down. A big number might frighten the markets with regard to [a winding down of] quantitative easing, and likewise, a worse than expected number will just remind investors that we are still very much in the woods in terms of the recovery.
Ishaq Siddiqi, market strategist at ETX Capital, said:
The ECB chief Draghi's inspired selloff is doing some notable damage to European financial markets, although cutting positions before what is likely to be an unpredictable non-farm payrolls report is also adding pressure to price-action. Wednesday's ADP jobs report fell short of expectations but [Thursday's] weekly US jobless claims were in line with estimates, leaving investors with few clues to adjust forecasts for the monthly jobs report.
It must also be noted that the escalation of tensions in Turkey is certainly not helping the markets' mood with the country's prime minister defiant against protests.
There were some notable risers. Johnson Matthey jumped 164p to £27.50 after the technology group reported a lower than expected profit drop of 9% to £389m. A recovery in the US truck market - where the company supplies catalysts to control emissions - helped offset weak precious metal prices. After the figures, Bank of America Merrill Lynch upgraded from neutral to buy, and said the company should benefit from new vehicle emissions legislation.
BT added 7.6p to 301.7p after Liberum Capital raised its target price from 315p to 345p. Analyst Lawrence Sugarman said:
We have increased our medium term cash flow forecasts driven primarily by more optimistic revenue expectations and further capex reductions. Although both regulatory announcements and a possible aggressive response from Sky to BT TV initiatives are risks, we believe these are outweighed by positive developments in respect of the pension, likely strong consumer key performance indicators on the back of the TV initiative and a lack of decent alternatives in the telecom sector. The shares have re-rated to some extent but both prospects and visibility have improved as well.
RSA Insurance rose 0.9p to 114.1p after a positive note from Morgan Stanley. The bank issued a double upgrade, moving from underweight to overweight and raising its price target from 124p to 136p. It said:
We see opportunity in RSA's lagging stock performance post the 2012 dividend cut.
The UK only delivered 10% of RSA's underwriting profits in 2012 despite accounting for 37% of premiums. The numerous self-help options available to the group combined with gradually improving market conditions will drive stronger profitability in our view. We see the dividend as secure at its rebased level, and forecast a material improvement in cover for 2013 to 1.8 times. Whilst initially not as strong as peers (where coverage ratios of 2 times are more common), this suggests to us that further cuts will not be required.
Among the mid-caps troubled insurer and boiler repair group Homeserve added 20p to 265.6p, a rise of more than 8% on renewed speculation of possible private equity interest.
The company is still awaiting the outcome of an FSA investigation into mis-selling, and nearly a year ago it was forced to deny speculation it was in talks with possible bidders. Joe Brent at Liberum Capital said:
Homeserve had a volatile trading session [on Wednesday], increasing 10% in the morning, and falling 6% over the whole day. The press speculate that Homeserve may be in the private equity cross-hairs. The shares are tightly held, and often prone to bouts of volatility. There are some genuine reasons for being more positive. The results two weeks ago confirmed numbers and gave some re-assurance that the new model can deliver stability and perhaps growth from a re-based level in the UK. We also sense that Homeserve is approaching an end game with the [regulator], which is most likely to be 'positive'. We do believe that the combination of these two things make Homeserve more attractive to a private equity buyer, who would value the relative resilience of the UK and the growth of overseas. We are genuinely unsure though, whether cost-savings, customer growth and retention will all come in at the right level to deliver consensus.
Pennon, tipped as a target along with the remaining listed water companies, was steady at 666p amid talk of possible interest from Far Eastern infrastructure funds and/or private equity, with a price of 850p a share mentioned by traders.
Finally BATM Advanced Communications, the telecom and medical equipment group, slumped almost 22%, down 4.25p at 15.875p. The Israel-based business issued a positive update early in May but now says first half profits will be materially below its expectations. The company blamed a delay in receiving components for its medical division from a third party supplier, forcing it to postpone deliveries to customers. It said the order backlog remained substantial and with some components now received, it was working towards clearing this in the second half of 2013. Lorne Daniel at house broker finnCap said:
This is clearly disappointing news but does not change the fundamental drivers for growth in the group.
Although the problem has since been resolved, given the significant cost, we expect management will look at possibility of compensation from the suppliers and at dual-sourcing to avoid repetition.
There is encouragement for investors. Medical expects to resume normal trading in the second half – the Diagnostics issue is in fulfilment not sales and clearly has plenty of demand with a strong order book to deliver on – while the Telecom division continues to see interest in the new T-Metro 8000 Ethernet Platform (effectively a whole new category of product) and its renowned Edge Genie solution.
Intriguingly, management believes that it has "an excellent chance to join consortia that is expected to win large, long term contracts in the very near future" which suggests major opportunities in the pipeline.
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