Stocks worldwide tumbled as geopolitical uncertainty pushed oil prices to record highs, heightening concern about corporate profits. BT and Standard Chartered were among the sharpest fallers in London.
The FTSE 100 index lost 95.6 at 5765.0 and the FTSE 250 slumped 185.2 to 9176.2, not helped by a warning from magazine publisher Emap. Declines were broad, with only eight blue chip shares finishing in positive territory.
Israel's strikes on Lebanon encouraged traders to sell their higher risk investments, pushing the dollar lower against sterling and forcing gold towards a six-week high. As well as the rising anxiety about the Middle East, investors had to digest news that North Korea walked out of talks with South Korea and that Iran was not budging on its nuclear programme, bringing forward the prospect of the United Nations imposing sanctions on OPEC's second-biggest oil producer.
A barrel of New York benchmark traded at $76.35, soaring past last week's record high of $75.78 to take its gain to 32 per cent since February. Weekly data released late yesterday showed a sharp fall in US crude stockpiles, and word arrived today of another pipeline attack in Nigeria.
Wall Street markets told the same story, with the Dow Jones Industrial Average falling as much as 111.3 to 10901.9 -- its first break below 11,000 this month. The US measure yesterday dropped 121 points as negative analyst notes on Dell and Apple rattled nerves about what has, so far, been a fairly uninspiring second quarter earnings season.
Worldwide, the cross-border FTSEurofirst 300 index slid more than 1.3 per cent and Tokyo's Nikkei average lost 1 per cent in advance of tomorrow's interest rate decision, when the Bank of Japan is widely expected to end its zero-rate policy.
For an overview of world markets, click here.
On the FTSE loserboard, BT slipped 2p to 234.25p after competition worries led Goldman Sachs to cut its recommendation to "sell" from "neutral". The US broker noted recent industry data on local loop unbundling (LLU) -- switching the final-mile service provider from BT to a rival -- has lately accelerated to 30,000 customers a week, more than double the rate seen in the first quarter of this year.
Goldman estimates that every one million BT customers lost to LLU takes 4.7 per cent off its earnings, or 1.6 per cent where BT retains the wholesale business by sharing its facilities with a third party.
"We expect the rising flow of connections to LLU to have an increasingly visible impact on BT’s financials and operating statistics, which so far, it has not," the broker said. "We expect that with this headwind BT will find it increasingly difficult to deliver growing earnings."
Track BT shares here.
Standard Chartered slid 37p to £12.49 on speculation it is in pole position to buy LG Card, one of Korea's biggest credit card issuers. The lender, which narrowly escaped bankruptcy two years ago after Korea's consumer boom reversed, has a market value of about $6.1 billion.
Fourteen original creditors own 72 per cent of LG Card, having invested $4.2 billion in 2004 to prevent its collapse. They had originally planned to sell their holdings by auction to the highest bidder, but legal restrictions intended to protect minority shareholders will likely force them into selling via public tender. That means any buyer will have to take 100 per cent of LG Card, rather than the purchasing a majority stake.
A 100 per cent purchase would imply extra costs of $2.6 billion, according to analysis from ABN Amro. Such a price tag would likely put the lender out of reach of smaller bidders, making Chartered the more likely buyer.
Analysts at ABN reckoned Chartered could afford to pay $8.7 billion for LG Card, a premium of 37 per cent on its current value. This would require a cash call of between $4 billion and $5.7 billion, or 13-18 per cent of its current market capitalisation, ABN said.
The Dutch broker said that paying such a premium "seems to stack up financially, but the size of the likely equity issuance means investors can wait before buying, especially as Chartered standalone looks expensive." It repeated "sell" advice.
For detailed information on Chartered, click here.
From cash calls speculative to actual. Aviva slipped 23p to 690p after the insurer agreed to pay $2.9 billion in cash for US index-linked annuities specialist AmerUs, a 10 per cent premium to its closing price the day before the two companies confirmed they were in talks.
Aviva said it would pay for the deal in part with a fully-underwritten share placing at 700p apiece, raising £900 million and expanding its issued capital by 5 per cent. The rest will be funded with debt and existing resources.
The deal was not cheap, at 12.5 times 2007 earnings compared with AXA's takeover of Winterthur at 11.5 times. And, while Aviva said it will be earnings accretive in 2007, analysts estimate it will in fact be dilutive because the group's embedded value by 3.5 per cent compared with just 1 per cent earnings uplift.
But, given the AmerUs purchase price less than a tenth of Aviva's market value, the sums were not overly significant for investors. "Overall, it looks OK but the equity market remains suspicious of empire building," said Fortis Asset Management.
Merrill Lynch argued that the shares' valuation is looking undemanding. It told clients: "There are understandable reasons why investors are hesitant about the acquisition of AmerUs. However, Aviva's share price has fallen by 6 per cent price over the past week in anticipation of today's announcement; we regard that as an over-reaction for a relatively small transaction that should have little adverse impact on Aviva's financials.
"The share placing may be a short-term overhang, but we feel that the shares can start to recapture the recent fall," it concluded.
Aviva's share issue added to the surfeit of insurance equity, after the flotation of Standard Life earlier in the week. This glut, along with the market's negative trend, pushed Legal & General lower by 4.25p to 123.5p and pressured Prudential -- Aviva's ex -- by 16.5p at 559p.
For more on Aviva, click here.
Mining stocks, the blue chips most sensitive to market trends, led the fallers even as metals markets divaricated: nickel and gold were up while copper and platinum were down, but Vedanta finished lower by 74p to £13.36 and Lonmin lost £1.28 at £27.77.
JP Morgan today cut forecasts for key commodities including aluminium and gold, while lifting forecasts for base metals because of "structural changes in industry costs". While June business surveys pointed to continued strength in Asia and a resurgent euro area, forward indicators suggest the best of times are ending for the metals, the broker told clients.
Among the oil stocks, Shell slipped 24p to £19.06 as record crude was countered by comments from the Algerian oil minister indicating the nation will introduce a windfall tax on oil and gas contracts, and that state-owned energy company Sonatrach will be awadred a majority share in any projects.
Algeria is expected to account for about 2 per cent of BP's production this year, while Shell has recently embarked on an expensive exploration programme in the area. BP closed higher by 1p at 641p.
Track today's trading by industry sector here.
Hotels operator InterContinental drifted 13p to 941p after confirming the sale of seven hotels in Europe for £440 million, a 20 per cent premium to book value.
The company also agreed long term agreements on at the assets worth around £7 million a year before tax. In sum, this unlocked value worth 30p a share, according to ABN Amro.
Read Emap's statement here.
Magazine publisher Emap sank 125p to 712p after it warned that worsening trading conditions meant underlying revenue may be down slightly in the first half and broadly flat for the year.
The company, which publishes FHM and Closer, said weekly titles were doing well, but there had been an increase in the rate of decline in other titles, particularly men's and automotive. Traders said consensus earnings expectations were likely to fall by about 5 per cent in reaction.
For more on Emap's warning, click here.
Elsewhere in the media sector, EMI dropped 28.25p to 277.75p amid doubts about whether EMI's mooted tie-up with US rival Warner Music would get regulatory clearance. That comes after a European court annulled the European Commission's decision to approve the 2004 merger between Sony Music and BMG, because it violated antitrust rules.
Industry watchers now believe the Pacman bid battle between EMI and Warner Music will be put on pause until the regulatory picture clears.
Track EMI shares here.
Insurance broker Jardine Lloyd Thompson tumbled 39.5p to 350p after smaller rival Heath Lambert terminated takeover talks. JLT shares had traded as high as 410p a week ago after the company confirmed long-running speculation that discussions were taking place.
Adrian Colosso, Heath Lambert's chief executive, said his firm had pulled the deal after losing faith that the combination would be successful. "Proceeding would not have been in the best interests of out staff or our clients," he added.
For detailed information on JLT, click here.
Among the minnows, ATM supplier Scott Tod added 5.75p to 19.25p after agreeing to a £7.45 million takeover by private equity firm Rutland Fund, equivalent to 21p per share.
Todd shares had dived from 68p over the past 18 months after the company went for scale rather than positioning, meaning many of its 2000 cash machines were stuck in unprofitable sites. This caused a string of profit warnings and a rescue share issue in January, priced at 11.5p apiece. Nicholas Tod, its former chief executive, twice failed in attempts to regain control of the group.
On broker watch:
Exane BNP Paribas rated Standard Life "underperform" in new coverage.
HSBC raised British Airways and EasyJet to "neutral" from "underweight". It also moved AstraZeneca to "neutral" from "overweight".
Altium raised Kensington to "buy" from "add".
Seymour Pierce started KazakhGold with a "buy" rating.
Panmure Gordon lifted Taylor Nelson Sofres to "hold" from "sell".
Dresdner Kleinwort upgraded Amvescap to "hold" from "reduce".
Bridgewell raised Marks & Spencer to "buy" from "neutral".
Merrill Lynch lifted Gondola, IG Group and AGA Food Services to "buy" from "neutral"
And Morgan Stanley rated Inchcape "overweight" in new coverage.
This report is continuously updated. Users of Internet Explorer should press control and F5 to make sure they are reading the most recent version.
Do you have a comment to make on the markets? Write to Times Online's Business desk at markets@timesonline.co.uk, where we will publish the most interesting e-mails.
This website adheres to the system of self-regulation overseen by the Press Complaints Commission. The PCC takes complaints about the editorial content of publications under the Editors' Code of Practice, a copy of which can be found here.
