With all eyes turned to Iran, the natural resources sector provided the market's ebb and flow as London's top stocks failed to make a fourth straight gain. BG Group and power station owner Drax were notable blue chip decliners.
The FTSE 100 Index ended weaker by 12.6 to 5902.6, having peaked at 5949.2 at the open and drifted to 5878.4 near midday. The broader FTSE 250 fared little better, losing 10.6 to 9493.1 as uninspiring results from Bodycote countered a broker tip on Taylor Nelson Sofres.
Daily turnover was among the slimmest so far the year, reflecting a quiet City diary and the August holiday season. Fewer than 1.8 billion shares changed hands by the close, and a fair chunk of that came as part of an institution's basket sale inside the first hour.
Wall Street was similarly hesitant, although the Dow Jones Industrial Average rallied 29.2 to 11374.2, having ended down for the first session in six. Better than expected results from house builder Toll Brothers helped settle nerves.
But oil provided the main subject of discussion on both sides of the Atlantic after Iran said it was ready to start talks with six world powers about their offer to defuse a standoff with the West over the nation's nuclear programme.
Iran today delivered its former response to a United Nations plan calling for it to suspend uranium enrichment. However, details of the response were not made available and Iran officials again gave no sign it will comply with the UN's demands.
New York benchmark crude traded at around $72.15, down a few cents on the day after jumping more than $2 in the two previous sessions. On the FTSE, Shell closed off 20p to £19.47 and BP lost 3p to 616p.
BG Group underperformed all day, retreating 9.5p to 695p as French broker SocGen started coverage of the gas specialist with a "sell" rating and 655p valuation.
SocGen told clients that BG's spectacular performance over the past couple of years, which has seen the shares rise 120 per cent, can be attributed to its perceived status as a potential takeover candidate and to expectations of very robust earnings growth. Both stories are questionable, its team argued.
"We believe that BG's high share price compared to its North American peers makes a takeover bid for the group by an international company relatively unlikely," said SocGen in a clients' note, in which it calculated that shares are a premium of between 35 and 50 per cent versus Norwegian and Canadian rivals Statoil and EnCana.
"Additionally, the outlook for earnings growth from 2010 onwards is risky, as the Karachaganak field [in in northwestern Kazakhstan], whose future development phases still remain highly uncertain, is forecast to be one of the principal growth drivers."
The mining sectos proved equally jittery, with Vedanta Resources erasing an intitial gain to stand down 9p at £13.70 and Xstrata slipping 3p to £22.50. There was some weakness in the metals markets, with copper returning some of yesterday's 3 per cent gain even as the strike at Escondida, the world's biggest coppers mine, entered its third week.
According to analysts at JP Morgan, the metals market's current obsession with supply-side disruptions such as Escondida may be distracting from longer term trends.
"The more slowly moving tanker-like demand side takes a back seat in terms of the focus of attention of the market," the broker's team, led by Jon Bergtheil, said in a daily bulletin. "The demand side typically quietly goes about its business with little attention until the day arrives when there is no more supply-side shock-news, and then market attention focuses on the demand side once more, often to discover that the slow moving tanker has changed direction some time ago."
In this case, it reckoned the US economy may be turning. The States, responsible for 30 per cent of the world's metal consumption, has seen key growth indicators such as housing starts falll sharply this year, and major US manufacturers such as Ford have recently slashed production. China, in spite of its growing market share, may not pick up the slack given its government's efforts so slow economic expansion with interest rate hikes, the JP Morgan team said.
Track today's trading by industry sector here.
Back to equities, and InterContinental faded 6p to 898p after interim results from the hotel operator proved much as expected, but came with no significant news about its cash return plan. The company said it would make a formal commitment to return excess cash by February 2007.
The Holiday Inn operator revealed operating profit from its continuing operations up 30 per cent to £107 million, beating the City range of £94-104m. However, Morgan Stanley's team said the beat was mostly to do with the phasing of overheads and marketing costs, and left year-end forecasts unchanged. The broker also said it was "unclear" why the cash return was taking so long.
For more on InterContinental, click here.
Drax lost 18p to 902p after the UK government yesterday published a site-by-site breakdown of its new carbon emission allowances. Generally, said analysts, the Scots power generators came out ahead of their English counterparts.
For phase 2 of the CO2 programme, running between 2008 and 2012, Drax will get just 66 per cent of its previous allocation of carbon permits. Scottish & Southern Energy will receive 80 per cent of its phase 1 allocation, while Scottish Power will get 75 per cent of its former allotment.
Dresdner Kleinwort recommended clients switch from Drax to Scottish & Southern. Its analysts calculated that, under the new restrictions, its sum-of-the-parts estimate on Drax would fall to 850p from 835p. Scottish & Southern and Scottish Power added 20p and 5p respectively against its previous valuations of 1250p and 590p per share.
Persimmon eased 16p to £12.60 even after the UK house builder revealed interim profit near the top of market expectations and provided a moderately confident view of the future even after the recent UK interest rate hike.
Britain's biggest home builder posted a record £271.5 million in profit before tax, up 16 per cent from a year ago and beating consensus expectations of £264 million (the range went £250-276m). But Persimmon had already revealed average selling prices and unit sales in a trading statement, meaning there were few surprises in the detail.
For more on Persimmon, click here.
Bodycote was among the weakest mid-caps, losing 11.5p to 237p after its first half results came in below the top end of expectations because of weaker than expected profitability. The headline numbers met consensus due to currency movements.
The heat treatment and materials coating specialist revealed organic sales growth of 7 per cent, driven by a recovery at its materials testing division and improved demand across mainland Europe. But operating profit margin increased just 0.1 percentage point to 14.3 per cent, as rising salary and energy costs were not recovered in full.
Bodycote also cautioned that, if current sterling strength continues, its earnings before interest and tax will be lower year-on-year by £900,000 in the second half. Its first half earnings totalled £40.6 million.
Taylor Nelson Sofres added 4.75p to 180p with the help of ABN Amro, which started coverage of the research firm with a "buy" recommendation and 210p target. The broker said TNS shares look undervalued against its peers, and that its strong franchise and "gap-free global footprint" has been underestimated.
ABN's call follows TNS warning on profits in early July, because of weakness in its US custom research business. That led the group to begin an operational review aimed at making it more competitive and winning value-added business, as well as reducing its cost base.
The broker also floated the idea that TNS, as the only mid-cap market research company with a 100 per cent free float, could be a takeover target.
"The sector offers good long-term structural growth potential, a degree of defensiveness in an economic slowdown and a twist of cyclical upside in an upturn," said ABN. "we believe the recently launched full operational review will provide significant upside potential in terms of increased efficiencies, unleashing of synergies across the group and an increased focus upon key account management."
In the small caps, magazine publisher Future slid 2.25p to 31p after issuing its second profit warning in just over three months, and its sixth in two years. The firm blamed weakness on the newsstands across all titles in combination with a tight advertising market, as it usually does.
The company cut guidance on current year underlying earnings to £13 million from £16-16.5 million and said tough markets would persist for the forseeable future. The company, which publishes computer games titles such as the official Playstation 2 magazine, is due to deliver a strategy review under Stevie Spring, its new chief executive, in June.
The latest profit warning put Future's debt levels under the spotlight. The firm's existing covenant, which the company said it expects to meet in September, defines that debt will not exceed three times 2006 underlying earnings, including an annual depreciation charge of £1.5 million. Based on old earnings forecasts, UBS analysts expected the company to have £41 million in net debt by September, which would put its balance sheet under pressure should tough trading persist.
On broker watch:
Morgan Stanley restarted coverage of National Grid with an "overweight" rating and 695p price target.
HSBC raised RHM to "overweight" from "neutral".
Canaccord Adams started Ubiquity Software with a "buy" stance and 43p target.
Evolution Securities raised Torex Retail to "buy" from "hold".
Goldman Sachs restarted coverage of Premier Foods with a "neutral" rating and 265p target price.
Numis cut Bodycote to "hold" from "buy".
Cazenove started Standard Life with an "outperform" stance.
And Cazenove lifted BBA to "in-line" from "outperform".
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