Commodities drag FTSE 100 down as euphoria wears off

THE UK’s leading share index closed lower yesterday, led by weaker commodity prices, as earlier gains were reversed in tandem with a weaker showing on Wall Street as Wednesday’s boost from central bank intervention moves proved short-lived.

At the close, the FTSE 100 index was down 16.08 points or 0.3 per cent at 5,489.34, just off the day’s low of 5,486.87, having reversed from a session peak of 5,553.89 in choppy trade.

US blue chips were down 0.3 per cent by London’s close, also having posted strong gains on Wednesday, after the latest weekly US jobless claims rose by more than expected, creating some concerns ahead of Friday’s November jobs report.

“Now that yesterday’s central bank adrenaline shot has worn off, we have been digesting the fact that maintaining liquidity to prevent insolvent banks disappearing into the abyss does not fundamentally improve the bigger picture,” said Will Hedden, sales trader at IG Markets.

Integrated oils were the biggest drag on the blue-chip index, led by BP, down 1.4 per cent, as the crude price dropped more than one per cent.

Miners fell back as copper prices lost ground after disappointing data from the US, China, Britain, and the Eurozone heaped demand concerns on the sector.

China, which cut its banks’ reserve requirement to shore up the economy on Wednesday, said its factory sector shrank in November for the first time in nearly three years.

Britain’s manufacturing sector shrank for a second successive month in November and at its fastest pace since June 2009. And the Eurozone’s manufacturing sector contracted at its fastest pace in two years last month, as the downturn in the periphery took hold in the core.

Miner Vedanta Resources shed 0.8 per cent, hit by a Credit Suisse downgrade to “neutral” from “outperform”.

RBC Capital Markets, meanwhile, lowered most of its 2012 forecasts for commodity prices, with the exception of aluminium and uranium, which it left unchanged, and cut target prices in the sector to take into account slower forecast growth.

Banks saw initial gains reversed, with the sector having leapt on Wednesday after the move by central banks to inject liquidity into the global financial system designed to easing the sector’s funding constraints.

Lloyds Banking Group, Royal Bank of Scotland and Barclays shed 3.3 per cent, 2.1 per cent, and 1.7 per cent respectively.

Nomura said it viewed Barclays as relatively investable among the domestic banks, despite the challenges BarCap faces, but Lloyds and RBS were more uncertain due to worries over the sector’s fundamentals.

Among blue chip gainers, Kingfisher added 2.2 per cent after the home improvements retailer beat third-quarter earnings forecasts in spite of a tough economic backdrop.

Defensive stocks were also in demand, with Imperial Tobacco and telecoms firm Vodafone both up one per cent.

Mario Draghi, head of the European Central Bank, signalled the ECB was ready to take stronger action to fight Europe’s debt crisis if political leaders agree next week on much tighter budget controls.

“Politicians seem to be finally getting their act together and making some decisive decisions. We can only hope this trend continues as the global economy is shaky to say the least,” said Simon Furlong, a trader at Spreadex.