Jitters ahead of euro summit and downgrades sink FTSE

BRITAIN’S top shares sank to their lowest close in more than a week yesterday, having endured another choppy session, as investors jostle for position ahead of a crucial European Union summit outcome today.

Sentiment was hurt when European Central Bank president Mario Draghi cooled market expectations about the prospect of an acceleration in ECB bond purchasing, although the bank did cut interest rates by 25 basis points to one per cent.

The Bank of England, meanwhile, decided to keep interest rates at 0.5 per cent, a move widely anticipated by investors.

“I think the market has had a terrific rally going into the ECB meeting and again the market is very optimistic that European politicians will sort out the crisis in the next few days,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500m of assets.

“Experience has taught me that this is probably very wishful thinking and yet another meeting is a more likely outcome.”

Against a backdrop of heightened investor uncertainty, traders noted moves to diversify portfolios by offsetting riskier assets with defensive sectors such as tobaccos and pharmaceuticals -- the best performers yesterday.

British American Tobacco topped the blue-chip leader board, up 1.5 per cent, with peer Imperial Tobacco ahead 0.7 per cent, and drugmaker GlaxoSmithKline 0.8 per cent up.

As investors focused on the EU summit, and the possibility their hopes for a credible solution for stopping the debt crisis from spreading would be dashed, commodity stocks and banks came under heavy pressure.

Standard Chartered shed 1.4 per cent after the Asia-focused bank said income growth will be “just below’ its 10 per cent target this year as the Eurozone debts crisis slows activity in its key Asian markets, adding to problems in India and Korea.

The FTSE 100 ended down 63.14 points, or 1.1 per cent, at 5,483.77, its lowest close since 29 November, after a see-saw session, reversing from an intra-day high of 5,605.27.

“You could be seeing people just positioning themselves – a bit of risk aversion, a bit of short covering, just in case investors don't get what they're hoping to see,” Angus Campbell, head of sales at Capital Spreads, said.

Campbell added that in the case investors were disappointed by the summit’s outcome, the FTSE 100 could conceivably drop back towards its lows for the year, around the 5,000 level. Credit Suisse said it is working on the assumption that there will be a difficult recession in Europe, but is no longer factoring a global recession into its valuations.

The bank maintained its “market weight’ sector stance on pan-European Capital Goods, but has cut its ratings for five firms, as it seeks stocks with low exposure to Europe, and adjusts target prices.

Among these stocks is UK-listed GKN, downgraded to “neutral”, and IMI, cut to “underperform”. Their share prices suffered respective falls of 3.4 per cent and 4.5 per cent.

Citigroup said the sovereign and banking crisis in the Eurozone will lead to a protracted recession.

The bank said it favoured emerging market plays in the developed world and is “overweight” in British equities due to its heavy weighting of commodity companies and remains “neutral” on Europe excluding Britain, given the current concerns.w