Commodity shares and banks pull FTSE below important 5,500 mark

WEAKNESS in commodity stocks and banks pulled Britain’s top shares lower yesterday, extending last week’s drop as investor appetite for riskier assets was curbed by global growth and Eurozone debt worries ahead of a summit of European leaders.

The FTSE 100 index was down 25.73 points, or 0.5 per cent, at 5,487.96, dropping back though the psychologically important 5,500 level once again. The UK blue chip index closed one per cent lower on Friday.

A meeting on Friday of German, French, Italian and Spanish leaders saw Germany agree to a €130bn plan to boost growth, but there was little progress on a more flexible use of Europe’s rescue funds ahead of a wider meeting of European leaders this week.

According to a document prepared for the 28-29 June meeting, European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund.

“Another week, another summit on Europe...and pressure is mounting for a resolution. European leaders appear likely to endorse a €130bn growth package, designed to counteract some of the negative effects of fiscal austerity measures currently in place across the continent,” said Rebecca O’Keeffe, head of investment at Interactive Investor.

“Unfortunately, that may be all the summit delivers, with Germany continuing to resist proposals for common debt issuance or more flexible usage of existing bailout funds.”

The absence of Greece’s new Prime Minister and finance minister due to illness complicated the meeting’s outlook.

Skepticism that the EU summit will tackle the debt crisis led the FTSEurofirst 300 down 1.5 per cent to 987 points, its biggest daily fall since a 1.9 per cent drop on 1 June. Meanwhile, European banking stocks led sectoral decliners, with the STOXX Europe 600 Banks index down three per cent, led by falls for several peripheral Eurozone heavyweights including Santander, down 4.7 per cent.

JP Morgan remained “underweight” on cyclical stocks, such as banks, miners, and energy stocks, in spite of them having seen 15 per cent underperformance in Europe since the end of the first-quarter, noting rising structural concerns given slowing emerging markets and China.

“We think Q2 reporting season will be a reality check ... Most have a base case view of “soft landing” in China, but the data suggests otherwise and risks are skewed to the downside,” JP Morgan says in an equity strategy note.

Drug maker Shire was the biggest blue chip faller, down 11.25 per cent on competition concerns after US approval of a new generic version of its Adderall XD attention deficit hyper disorder (ADHD) treatment, produced by Actavis.

In reaction, JP Morgan reduced its target price for Shire to 2,360p from 2,500p but retains an “overweight” stance.

“We believe weakness around AXR offers an attractive entry-point for long-term focused investors ... with Shire’s very strong medium-term growth outlook significantly undervalued,” JP Morgan said in a note.

WM Morrison was also weak, down 2.8 per cent after the food retailer said its finance director, Richard Pennycook, intends to leave the company at the end of June 2013 to concentrate on building a portfolio career.

Among the blue chip gainers, Russian metals group Polymetal was a top performer, up 1.7 per cent, with Nomura double-upgrading its rating “buy” in a review of the European gold sector.