US rate warning hammers FTSE to April’s lowest close

BRITAIN’S top shares fell sharply yesterday as ratings agency S&P cut its US credit outlook to negative, but some investors doubt this will spur a much more significant flight from risky assets than already seen.

The FTSE 100 closed down 125.93 points, or 2.1 per cent, at 5,870.08, its lowest close since 23 March.

Just two companies in the FTSE 100 saw their shares gain yesterday - WPP, up 0.14 per cent, and Serco, which gained 0.09 per cent.

The FTSE 100 volatility index, a barometer of investor anxiety, jumped nearly 26 per cent yesterday, its biggest one-day percentage gain since November 2009.

The higher the index, the lower investor appetite for risky assets such as stocks.

S&P downgraded its credit outlook for the United States to negative from stable, citing a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit.

Mike Lenhoff, chief strategist at Brewin Dolphin, which has £25bn of assets under
management, said: “People will have to say, ‘Well look, has this really altered the outlook for earnings?’ And I personally don’t believe it has.

“What this is a shock to the system... but more than anything else, it’s a galvanising moment. It’s a message to Congress to smarten up, get your act together and then there won’t be any problem,” he added.

Yesterday’s move by S&P served to further unnerve investors already dealing with worries about Eurozone debt, with a focus on Greece where markets are concerned the country will eventually need to restructure its debt.

Adding to worries, Finland’s True Finns anti-euro party, which was voted into a powerful role in the Helsinki parliament at the weekend, said it expected the EU to change plans for a bailout of Portugal.

Banks were pressured, with Barclays, which has a big exposure to Iberian debt, leading the sector lower, off 3.6 per cent, trading 151 per cent of its 90-day daily average.

A broker downgrade by UBS weighed on Resolution, down 4.8 per cent.

Inflationary pressures weighed on mining stocks after China raised banks’ reserve
requirements on Sunday for the fourth time this year, to keep its overheating economy in check.

British orthopaedics company Smith & Nephew shed three per cent after Swiss medical device maker Synthes said it was in merger talks with Johnson & Johnson, which poured cold water on speculation that J&J was targeting S&N.

S&N shares traded 269 per cent of their 90-day daily average.

On the upside, Serco was one of only two blue-chip gainers, up 0.1 per cent, with contracts for difference specialists Galvan rating the stock a “buy” and highlighting technical factors as supportive.

Joshua Raymond, market strategist at City Index, said that if anything, S&P “is probably only stating officially what many in the market are already thinking”.

“Whether or not this is likely to herald a wider move to risk aversion than the short-term move we have already started to witness remains to be seen,” he said.

Technical analysis for the FTSE 100 was bearish, with Michael Hewson, market analyst at CMC Markets, saying a break below a 5,860 support – the 2 March and 24 February lows – could signal a move back towards the 200-day moving average of 5,720.